Q3 2020 Ovintiv Inc Earnings Call

Only 30.

Unit costs continue to trend lower in the fourth quarter, we expect slightly lower per unit costs, when compared to the third quarter with our total cost projected at about $11.70 per Boe.

One of our most impactful achievements is the cost cutting that came from every part of the company. We have achieved more than $200 million of cost savings in 2020, and next year, we expect that to grow to $300 million.

The value of our risk management practices has once again been clearly demonstrated our dynamic hedging program protected 2020 cash flow and enhanced margins to what has been an incredibly volatile commodity price environment.

In the fourth quarter, we have hedges in place for 100000, 180000 barrels a day of crude and condensate or about 90% of our volumes and we expect to see strong price realizations across all products. So now I'll turn the call over to Greg to cover our operational highlights.

Thanks, Doug.

Today, we are providing new and lower well cost forecast in each of our core areas. We've updated the slide throughout the year to show our constant progress and our pacesetter results in each of the plays.

As you can see in our 2021, well costs estimates table, we continue to meaningfully drive down our drilling complete costs when compared to last quarter, we reduced cost $400000 in the Permian and $200000 in the Montney.

In the Anadarko, our cost are now more than 40% lower than Newfield average cost at the time of the acquisition.

Well costs that were 7.9 million about two years ago are now $4.6 million.

As a result of these improvements our 2021, well cost will be at least 20% less than our 2019 actuals.

In the Permian, we've seen significant improvement since the second quarter costs were about $500 per foot or 9% lower our pacesetter wells came in at $430 a foot.

This was one of our best quarters ever and the good news was distributed across Howard Midland and Martin counties.

Our well cost reductions are highly durable through cycle. They are mostly related to our own unique innovation and process changes not simply lower service costs.

We know that our operational achievements are being recognized by investors.

We've been getting lots of questions recently about how we were able to continually take cost out of the system, while delivering strong well results.

At the heart of this achievement is our culture of innovation and our multi basin model to shift ideas and technology rapidly across our portfolio.

Constant innovation and our ability to significantly lower costs have been critical to our development plans, we have not up spaced wells to generate a short term boost at the expense of future inventory, our chief development model is the right approach and our operations in the field are differentiated.

We use our cube development model to maximize the value of our acreage and in each of our core areas today, we have over a decade of inventory.

In the Permian, we continue to see great results from Simon Frac completions, providing up to $400000 per well and savings.

We have a track record of rapidly moving good ideas throughout our portfolio and are now using Simon fracs in the Anadarko in the Montney.

In the Anadarko, we've seen big decreases in our cost and remain confident that we can continue to find innovative cycle time enhancements.

The use of wet sand in our completions has been successful all of our fleets are now pumping wet sand.

In addition, we continue to see the benefit of self sourcing chemicals.

Our Springer results have continued to go show good cost reductions as well in fact, we have recently achieved four of the five fastest wells drilled in the play to date.

We are averaging over 20 hours of completion pump time per day in the basin, which is significantly above historical base and performance.

In the Montney, we achieved record low drilling cost of under $1 million per well and we completed our wells and about two days.

This is half the time it took in 2018.

These efficiency gains are the result of relentless innovation and attention to detail and will stay with us regardless of commodity prices.

We've also started up our pride pipestone processing facility in the Montney five months ahead of schedule.

Making it our fourth large project running ahead of schedule and at or under budget cost in the last three years.

This is resulting in lower pressures in the gathering system and the startup does not require any new drilling to satisfy the capacity arrangements.

I'll now turn the call back to Doug to talk more about 2021.

Thanks, Greg we have been delivering on the new MP model for several years going forward. We are focused on four priorities we.

We are layers laser focused on debt reduction 2020 will be our third consecutive year of free cash flow generation and as we have stated all available free cash will go to debt reduction.

Our plan will reduce our debt by at least $1 billion from the second half of 2022 year end 2021.

Second we know the importance of maintaining scale and positioning our company to thrive when demand for our products returns. We can hold 200000 barrels a day of crude and condensate production with an annual investment of $1.5 billion. This screens is one of the best capital efficiencies in the NP sector today.

Third we see our cost reductions and newly generated efficiencies is durable they will stay with us even after oil prices recover our teams have done a great job of safely reducing costs. This year and their hard work has a set up for a very strong 2021.

Finally, we remain committed to returning cash to our owners we have a track record of doing so it's how we have been and are running the company our near term focus on reducing debt is the best value add for our shareholders today.

Our multi basin portfolio provides exposure across the commodity spectrum, although our focus is on crude and condensate don't forget that we produce a lot of gas with 1.5 billion cubic feet of gas per day of gas production, a small moving gas prices makes a big difference in revenues and cash flow and.

In fact, a 25 cent increase in gas price is about $100 million of incremental cash flow.

We have the key ingredients for differentiated value creation on the road ahead, and our priorities are crystal clear I'll now turn the call over to Corey.

Thanks, Doug we've been very clear in how we're going to run the company out to the end of 2021 and today, we are providing a longer term framework consistent with these he is.

Our business is capable of generating significant free cash flow in the near term, we estimate 800 million of free cash next year. We are confident that our plan will lower absolute debt and reduce our leverage we expect to reduce our total debt by more than $1 billion from the second half of 2012.

Any through year end 2021, again, all excess free cash flow will go to debt reduction over the longer term at mid cycle conditions. We believe that a leverage ratio of 1.5 times net debt to EBITDA or less is the rate aiming point.

Consistent with the new GMP model that we've been operating under for almost three years now we are formalizing a reinvestment rate as well, we expect to reinvest 75% or less of our cash flows providing significant free cash for shareholder returns.

We believe a secured dividend is a key part of the new GMP model and you will have noticed that despite conditions in 2020 route we remain committed to our dividend.

As we've outlined before our 2021 scenario equates to reinvestment rate of less than 70% as cash flow.

This reinvestment rate for 2021 is at or below many of the levels recently announced by our peers, which speaks to the quality of our assets and our cost structure.

I will turn the call over to Brendan to discuss BSG.

Thanks, Corey our approach to innovation applies across all aspects of our business we.

We are an industry leader in SG performance in reporting however, we recognize that investors are seeking increased transparency more consistency and continuous improvement from our sector and from our company.

Since we began publishing our sustainability report 15 years ago, we've consistently disclosed our SG performance and we've continued to evolve our report to meet stakeholder expectations.

We are on track to incorporate emission related performance targets in our 2021 compensation program.

We know the importance of yesterday to our stakeholders, we know the power of setting targets and we have high confidence in our ability to drive performance gains.

We're also playing a leadership role in industry to encourage greater transparency and consistency of reporting.

We've been taking actions to reduce our emissions through operational efficiencies and innovation for many years and we are pleased to report that just like our efforts to drive down well costs. Our team is also driving reductions in emissions as demonstrated by our results on methane intensity and flaring.

Ill now turn the call back to Doug.

Thanks Brendan.

We have been at the forefront of the shift to this new NP, we have been describing our approach and delivering on this model for the last several years.

Before opening it up to your questions I'd like to highlight a few things that Weve mentioned today, we know the importance of debt reduction we have laid out a plan for significant debt reduction in the near term driven by free cash generation.

We also know how important it is to maintain scale, we have put a lot of thought into our scenario and we now have made significant progress on demonstrating the performance that underpins that plan.

We continue to make incredible progress on driving efficiency. This.

This is not a trend that is slowing down for us, but it is driven by our culture.

And finally, we know the importance of returning cash to our shareholders and we have a strong record of doing this since 2018, weve returned more than $1.7 billion through dividends and buybacks, while many canceled a cut dividends earlier. This year. We maintained ours. We believe this is important to our shareholders.

Today, we believe the most effective way for us to return value to our shareholders is to reduce debt and that's where we're focused around.

Earlier this year, we committed to including key emissions related performance targets and our compensation program in 2021, and we are on track to accomplish that this is for the good good for the environment and it's good business.

Recent consolidation in our sector is validating our strategy, we have the proven ability and scale to drive leading efficiencies and generate significant free cash flow, our high quality multi basin portfolio and sophisticated risk management our differentiated.

These nghi ingredients comprise the new SMP model, when coupled with our world class operations, it's a powerful combination.

So thanks for listening and now we'd be prepared to take any of your questions.

Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star one we.

We will now begin the question and answer session include the first caller I'd.

Joanne at JP Morgan Chase. Please go ahead.

Yeah. Good morning, I had a couple of questions on the updated that free cash flow guidance and deleveraging target.

Doug The strip has moved against you a little bit in terms of oil. So my first question is what does the free cash flow and de leveraging outlook look like if we were to to dial in the current strip versus the 45 at $3 deck that you used.

Yeah Rune, if you know we provide some sensitivities to price because of course that moves around as we as we build our hedge book.

So if I could I'll just point you to that right now, but I think you may have noticed that we are about 90% hedged in the fourth quarter on crude and condensate and we're about 40% hedged in 2021.

Plus as you just highlighted the strip's very volatile right now as sentiments moving around and maybe the last point I'd make I think you know we demonstrated early this year if we if we end up.

In a very very tough environment, we acted beauly quickly in the actually probably unique in the industry.

We acted without.

Creating cost we didnt have to pay payments off off of that and and then the last thing I'd just highlight which is.

A little unique is that one and a half Bcf a day of gas production in alongside that sits 85000 barrels a day of Ngls, which that multi product portfolio also protects us from single product movements.

Fair enough.

And just my follow up here as you mentioned that the the cost structure on a per unit basis is an $11.70 per Boe we.

You'll get call it another 100 million or so kind of kind of tailwind.

Next tier, but any thoughts on that on the per unit cost structure as you move and then into 2021.

Can we used 11 seven in his back off maybe 100 million of savings on that as maybe a starting point.

Yes, and that 100 comes in a number of areas because of piece of that is is related to public which we Greg did mention but but he and his team successfully abandoned that project through co that no one got sick and we executed at under budget cost. So some of that's for new cost rolling up.

Rolling off next year, but around our costs will be lower than that the only thing you'd have to adjust for is production related taxes.

Tied to price but.

These need to go only one direction and that's down and it's really driven by innovation and I'm confident we will get that lower as we go into next year.

Your next question comes from it can mean way at Barclays. Please go ahead.

Hi, good morning, everyone. Thanks for taking my call.

Hi, Jane.

Hi, Good morning, my questions are on the reinvestment rate and on the new expected long term capital reinvestment rate of less than 75% can you just talk a little bit about how this can vary at different commodity price scenarios and then I guess my follow up as well.

When does the capital allocation framework become more Richardson I think the qualifier here is that it's a long term reinvestment rate I know you provided a lot of great clarity to retire in Taiwan. So does this really kick in is it like 2022 or is it more like 25 or so we're just looking for little bit more detail. Thank you.

Yeah, Jeanine I think well first of all.

And I think you guys can get all run your models on this but.

But next year, we would be investing below much below the 75% because what we've said is our priorities are holding or scale.

Essentially what is now todays production rate and then generating significant free cash and focusing every bit of of that on our on debt reduction.

And of course.

75% allows a lot of it allows to at least 25% of our cash generation to go to shareholder returns, but it also when it's lower than that creates other options, but those other options on the table today I mean for instance, you wouldn't even consider going back to growth until we get our debt.

And our confident we've got our debt, where we're looking to get it to and we're confident that demand for our products is return and we will begin to grow but what this does hopefully give everyone. Some insight into is how we'd run the business as the markets begin to stabilize and return and once we've got a.

Our debt down to the levels were targeting today.

And what were really demonstrating is what we've done for three years, which is we're not going to take all of our cash flow and then invested back into the business as a capital program to grow volumes.

Okay, I guess, maybe just following up on Aaron's the commentary on the SAP Hana moving against everybody right now so I guess if the strip holds.

And.

That said, we've got less than 75% reinvestment right are you willing to just let production decline and all of that in order to stick that number.

[noise], Yeah, Jeanine I think it all depends on on how we see the market developing I mean, if we find ourselves back not that many of us want to remember what it was like back in March and April of their results sorts of conversations going around about oil being $20 or less forever and other things and we just needed to one.

Get into action quickly by pulling capital back and buy time to see what the markets are doing and then just accelerate efficiency improvements if we end up in a world like that.

We can re can and will reconsider those things, but I think the other piece of information, which is important is we've said we could maintain 200000 barrels a day and generate free cash flow more than enough to cover our dividend all the way down to 35 in 275, So I think it's a bit hard to speculate and I think it's.

A bit early.

To be believing that the strip is actually right for next year, because right now it would be lower than 2020 prices, which feels a little unusual but we will act will protect the balance sheet, we do want to protect despite the scale the business, but we will protect the balance sheet and we have the ability to to be dynamic if that's the case.

The next question comes from Brian singer at Goldman Sachs. Please go ahead.

Thank you good morning.

Morning, Brian.

I want to pick up on the comments that you made at the end of your prepared remarks not consolidation.

And it seems to be taking a view that you have the appropriate level of scale for desired execution. The other companies appear to be sending a message being their consolidation announcement that greater size and scale are needed to be competitive yes.

You highlighted in your remarks risk management multi basin portfolio can you talk more to what you see is the reason for this difference in how you expect that it over then to translate into differentiation, whether it be in financial metrics, while performance inventory longevity et cetera.

Yeah. Thanks, Brian in unit talked about this many times over the years that you know we believe that even in the heyday of the pure play model and others that ultimately to be successful in a commodity that is going to see low growth globally.

And volatility is going to be a feature that a few things were going to matter. The companies had to have scale, we believe that somewhere around half a million Boe per day, maybe that number changes, but many of the transactions you see have seen have been trying to get to that scale because many of those companies were much smaller than that you.

You need that for a number of reasons organizational efficiency cost structures ability to apply innovation. We thought multi basin was always a key it's a part of risk management. We're also demonstrating the value of being able to move ideas around in real time I mean in every basin. We're in we're a low cost leader that some.

It's not by accident I think other skills I think this.

This risk management approach is key.

We've all seen that in spades more recently and that's everything from things like how you think about protecting your balance sheet and cash flows with hedging programs to how you actually do transportation and processing of your products. Many many people even recently have been caught by that and those uncertainties and this model works. So.

We think we're there we think we're where we need to be and we're very clear the best way to create shareholder value.

For our shareholders is continue to execute incredibly well and actually reduce our debt and thats, where our focus is today and we think that will make us very competitive going forward.

Great. Thank you and then my follow up is with regards to natural gas you highlighted the price exposure in the portfolio.

Is there a situation and you've been asked a couple of times here about the strip pricing strip oil price scenarios that natural gas prices.

On a current at fair basis, a pretty healthy is there a scenario where you shift capital out of some of the Oilier plays into the natural gas plays and what would be your priorities. There in terms of what it would come out of and what it would go what employer would go in within the portfolio.

Yes, Brian I mean, the great thing is we do have that optionality.

In a number of parts of the portfolio, but obviously more particularly up in the Montney, where we have everything from very high liquid yields condensate wells to almost to two dry gas that are very highly productive. So we have that optionality for us to do that it today it would take more than just strength in the short term strip. It takes some more.

Our fundamental view of it.

But as I mentioned, you know, we still get the benefit of that one and a half fees. The net exposure I don't think weve, yet seen enough to move the movement beyond 21 to really justify moving a lot of capital and we do have some concern about in particular with the private actors are going to do here with the movement in.

The strip and how they might throw capital in which could create longer term risk on gas prices, but we have that optionality, but today, we're not pulling on it.

But we continue to monitor it if we continue to see demand growth in exports grow and strengthen the longer portion of the curve, we could always go there.

Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.

The next question comes from FX sat at Bank of America. Please go ahead.

Thanks, Good morning, Doug I appreciate all the details on 2021 scenario and particularly on a 1.5 billion Capex I think you provided up a rig scenario. It on your slide 16, just following up on that if I'm thinking about Permian completion completions in 2021 would it.

25 to $30 30 completions per quarter with good run rate to use I know you're early in 2021 planning scenario, but just.

Completion cadence wise, what should we think about Permian and Permian at the total.

Yeah, Let me let me, let Greg answer your question there. Thanks.

So.

Generally our capital allocation will be similar as it was this year with probably a heavier focus on the other core assets. So Permian will be somewhere in that 25 wells a quarter I think would be a a decent average for you to assume.

Okay, and Permian would be roughly.

Roughly let's say, 40% of overall completion, 45%.

Somewhere in that ballpark again, we're still working through all of our final budgeting assumptions and the good thing is as we've got lots of different ways to get to the 200000 barrels a day next year and so we're still working through that but I think your estimates are in line.

The next question comes from Neal Dingmann at Tennis Securities. Please go ahead.

Morning.

Hey, My question is could you will speak to the 21 doubts you you mentioned kind of for the end of the I know you talked about 30, why I ask is obviously youre very active this quarter with around those 70 DUC completions I'm. Just wondering do you envision building going head building more ducs next year than that knocked them out at the end of the year or was.

This year unique given prices earlier in the year.

Yeah, Neal, it's you really get it right. There I mean, we as a company don't find a capital efficient to build ducs. It was a little unique this year, obviously with what happened in to Q.

Normally we keep at that around Thirtys, usually what's in the portfolio just at our current pace of development and Thats, what what you should expect us to have coming out of this year end and right now as Greg mentioned, we're in the final detailed planning for next year, but the program looks incredibly level loaded actually.

Beginning essentially with this quarter for Q.

As I mentioned, we're already at that 200000 barrels a day, which is what we've said we're going to be next year, we think thats basically flat through the year in the cadence of drilling and completions will be pretty flat.

As well as we go through the year.

But of course, if we have a macro movement in the commodity downward. We'll we'll we'll look carefully at that and figure out how best to respond if the commodity goes up we'll just reduced at even faster because we're not going to move off the 200000 barrels a day.

Okay, Great details there and then just one follow up on your how you think about your inventory depths than drilling plan and I guess I'm. Just wondering is that the reason for your diversified DNC plant I know what that three rigs I think you mentioned term into in that and there are good money.

Reasons for the diverse applied plan just the you know looking at the amount of inventory do you have any each or are there other factors that go into this.

Yes nail it.

One of the things we think it's all about a big piece of its about risk management that the good news is we built a portfolio, which delivers similar returns on capital in each they get there in different ways, but they get to similar returns so by distributing capital across the portfolio.

We actually don't put a we don't degrade returns and doing it but what it allows us to do is avoid risks that many times are hard to predict historically they were thinking about the Permian not too long ago. When it was short pipe capacity to get product out of the basin.

Remember not too long ago, there were some issues in Canada with Echo.

You know now there's a dialogue and some concern about federal acreage. So these are examples of risks why you have a multi basin portfolio, but I think it's critical that you not see degradation of returns as you allocate capital across it. So we think quite carefully about that and in some areas for instance, the Mont.

In these the classic were actually the amount of condensate and crude and condensate sales was lower than some of the other areas. But they are also very inexpensive wells have low royalty rates and actually right. Now we are getting paid more than WT WT pricing for that product, but thats why we do it Neal, but it doesn't doesn't cost us.

In terms of returns.

At this time, we have completed the question and answer session and will turn the call back to Mr. Campbell.

Thank you operator, and thank you everyone for your interest and your investment in our company. We look forward to seeing you soon have a great day.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your line.