Q4 2020 Ovintiv Inc Earnings Call
Yeah.
Good day, ladies and gentlemen, and thank you for standing by welcome to <unk>, 2024th quarter and year end results conference call.
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I would now like to turn the conference call over to Steve Campbell from Investor Relations. Please go ahead Mr. Campbell.
Good morning, everyone and thank you operator, we appreciate you guys dialing in today for our fourth quarter and you're in 2020 conference call.
This call is being webcast and the slides are available on our website at <unk> Dot Com. Please take note of the advisory regarding forward looking statements at the end of our slides and in our disclosure documents filed with SEDAR and Edgar.
Following our prepared remarks. This morning, we will be available to take your specific questions.
Please limit as always your time to one question and one follow up this simply allows us to get to more of your questions on today's call I.
I'll now turn it over to our CEO Doug Suttles.
Thanks, Steve and good morning, everyone and thank you for joining US we have a lot of exciting news to share with you today and following our prepared remarks will be available to answer your questions.
As you saw on our press release in early January and again in a report yesterday or day yesterday, our business is performing exceptionally well we are firing on all cylinders, we posted a strong finish to 2020 and ended the year with less debt greater efficiency and higher free cash flow outlook for 2021.
We're well positioned to execute our 'twenty, one plan and have very strong confidence in our ability to deliver on our targets.
Our 'twenty and 'twenty, one outlook remains consistent with our investment framework and reiterate our key priorities around debt reduction, including raising our organic year end 'twenty 'twenty, one target by 25%.
Additionally, we announced the sale of our Duvernay asset, which is demonstrable progress on our year end 'twenty 'twenty two debt objective.
We have an active shareholder engagement program and you can see elements of that in the governance changes included in todays material.
Before we jump into what's new lets quickly recap 'twenty 'twenty.
More than ever before 2020 prove the value of flexibility and optionality that we intentionally built into our business.
At the onset of the pandemic, we acted quickly and decisively to protect employees through a cross functional pandemic response team.
We use risk based procedures that enabled field employees to safely work and employees to return to the office, we immediately focused on reducing cost and implement a day dynamic production shut in strategy. We also rapidly adjusted capital spending and activity levels to protect the balance sheet.
Flexibility intentionally built into our contracts meant that we incurred zero penalties as we adjusted our business to market conditions.
Our hedges protected our cash flow and our balance sheet and generated more than $700 million in benefits.
I couldn't be prouder of our team and their efforts to say focused keep us safe and push the boundaries on innovation.
Our industry, leading efficiencies sophisticated risk management approach and our culture of innovation were crucial to our success. Our people found cost savings across every part of our business and we exited twenty-twenty, a leaner and more profitable company for the year, we generated total cash flow of 1.9 billion.
And for the third consecutive year, we generated free cash flow coming in at $193 million or about $285 million. If you include the one time restructuring cost.
We were able to deliver more with less in total capital came in below expectations at 1.74 billion.
Total debt was reduced by nearly $500 million from midyear 2020 levels and we maintained liquidity of $3 $3 billion.
Dislocations in the credit market allowed us to repurchase debt for a discount resulting in $30 million of gains and lower future interest expenses.
We cut more than $200 million in cash cost in the reductions will be durable and sustainable as commodity prices strengthen.
We also benefit from significant legacy costs rolling off in 2021.
Our teams again showcased our culture of innovation and did an outstanding job of reducing well costs, we surpassed our targets in our 2021, well costs will be 20% lower than 2019 averages Greg will cover more on this in a moment.
Not only did our resumption of completions late in the year come off on schedule and on budget, but we also saw a strong well performance in every area production came in significantly higher than guidance and gave us good momentum momentum going into 'twenty and 'twenty one.
We did all of this without losing focus on safety with 'twenty 'twenty being our seventh consecutive safest year ever with total recordable <unk> for.
For employees and contractors dropping to point to 0.19.
Today, we reinforced our priority on debt reduction by increasing our year end 'twenty 'twenty, one target and setting a clear target and timing for reducing total debt to four and a half million dollars in leverage to one five times debt reduction is our number one priority our $4 5 billion dollar target by the end of next year includes.
<unk> 1 billion in divestment proceeds.
And today, we're about 25% of the way there with with the announcement on the Duvernay.
Using our planned price deck for 50, all the other $50 oil and $2 75, St gas our strong performance on cost we have increased our growth or organic debt reduction target for year end 'twenty 'twenty, one by 25% to 1.25 billion.
Using mid year 2020, as the starting point with this plan, we expect to generate about 1 billion of free cash flow at the 50 to 75 price deck.
The longer term framework for investments remains intact with a leverage target of one five times net debt to adjusted EBITDA and a reinvestment rate of less than 75% of annual cash flows.
This provides a clear framework for the future as you know we have a robust annual shareholder outreach effort, where members of our board interact directly with our shareholders. In 2020. This represented ownership of about 40% of our shares.
These conversations help us to evolve best practices and incorporate their ideas and feedback.
As a result, we've made several important changes to our compensation plan recent changes include reducing our target LTI compensation for the executive by 15% in 2020, settling L. T I's and chairs to build insider ownership, including the S&P and X O P indices to our P. S.
Peer group.
Adding return on invested capital to our LTI metrics, including a methane emissions intensity reduction target for all employees.
Our priorities today are crystal clear, reducing debt, while maintaining our scale and driving efficiency across our business. We laid out a multiyear plan to reduce debt driven by capital discipline free cash flow generation and $1 billion and divestment proceeds.
Strong environmental performance and continuous improvement is part of who we are and we clearly demonstrated this with our venting and flaring performance, which was below half of one percentage of sales gas in the fourth quarter. Additionally, we have added methane emissions reductions to our compensation program.
We intend to maintain the scale of our business, while using all available free cash to reduce debt, we expect crude and condensate production of approximately 200000 barrels a day over the next two years.
With 2021 capital investments totaling $1 5 billion. This screen says one of the best capital efficiencies in E&P today.
We've made incredible progress in driving costs out of the business and holding onto those savings as legacy costs roll off over the next several years. This is a tailwind to our cash flows and our and our debt reduction efforts.
Lastly, we know the importance of returning cash to our shareholders. Since 2018, we've returned more than $1.7 billion through dividends and buybacks.
While many canceled or cut dividends in 2020, we maintained ours. We believe this consistency is important to our shareholders now I'd like to turn the call over to Corey.
Thanks, Doug our business can generate substantial free cash flow in 2021.
$1 billion at are at prices of $50 oil and $2 75 gas.
This will allow us to reduce debt improve leverage ratios and position us to repay upcoming bond maturities with cash on hand.
Although we've been closely monitoring the bond market and see strong pricing available to issuers with similar credit profiles, our preference is to pay down debt not push it out further into the future.
Including the proceeds from the Duvernay sale announced yesterday and the free cash flow. This year, we should have enough cash to pay both of our upcoming debt maturities.
Over the longer term, we believe that our leverage ratio of one five times net debt to EBITDA or less is appropriate and reflective of an investment grade credit rating.
'twenty 'twenty, one outlook equates to a reinvestment rate of about 60% of cash flow at the 50 and $2 75 and at current strip pricing. The reinvestment rate is just above 50%.
A secure and sustainable dividend as a key part of the new E&P model and you'll have noticed that despite conditions in 2020, we remain committed to our dividend imports.
Importantly, our 2021 program is highly repeatable for the same amount of capital or less in 'twenty 'twenty. Two we can maintain our crude and condensate production and with proceeds from asset sales. We're confident we can hit our debt target of 4.5 billion by the end of next year.
Our legacy costs are lower this year and moving lower overtime on accumulative basis, we will see 1.8 billion legacy cost reductions from 'twenty to 'twenty, one to 'twenty 'twenty fives, when compared with 2020.
As a big tailwind for our cash flows there is no execution risk associated with these cost reductions as they simply roll off with the passage of time.
This year, we will see a $250 million reduction in legacy costs compared to 2020. The primary components of these reductions are attributable to the completion of our decommissioning activities at the nuke over the last two years and the exploration of various transportation and processing contracts across the portfolio.
I'll now turn the call back to debt.
Thanks, Corey we have a strong track record of leadership in ESG performance and transparency in reporting.
We have been publishing a sustainability report for the last 16 years.
We realize the industry needs to do more to reduce the environmental impacts from our operations, while providing safe reliable and affordable energy the world needs from the boardroom to the field. We all know the importance of this to our stakeholders.
We are focused on reducing emissions and recently announced a methane intensity reduction target linked to compensation for all of our employees, we plan to reduce our methane intensity by one third from 2019 levels by 2025.
This target will be benchmarked against the 2019 actual methane intensity 0.15.
We do not routinely flare gas or drill wells in areas lacking infrastructure. Our performance in this area is industry, leading and in the fourth quarter of 2020 flared and vented volume accounted for just half of 1% of total gas production down significantly from one 2% in 2019.
We're proud of this result, and are focusing on continuing to reduce these volumes.
We have taken and will continue to take a leadership role within our industry trade associations on climate related issues, we believe that transparency consistency and continuous improvement from the entire sector are very important to drive down the emissions from our operations. Our performance in this area is being run.
<unk> as you can see here in the rankings from independent third party ESG rating agencies.
Our board human resources and compensation Committee regularly reviews executive compensation.
Through our annual board outreach program, they interact directly with investors seeking their input and feedback including on compensation the.
The committee also has an external compensation consultants to ensure they stay well informed on the latest practices in our industry and the broader business community.
Changes to our compensation practices include enhanced rigor and aligning our annual incentive payout curves with the broader market linking our methane intensity reduction to the annual incentive pay for all employees. The inclusion of key financial metrics in the 'twenty 'twenty, one scorecard, which include debt reduction free cash.
Low capital efficiency and total cost. The addition of the S&P 400, and the X O P indices to our peer PSU peer group and the inclusion of return on invested capital in the 2021 LTI program.
This builds on other recent changes to our compensation practices, including settling our LTI payouts in shares to build insider ownership.
Reducing the target value of LTI grants studios by 15% last year and 2020 tapping to pay out a PSU awards at 100% if our three year total shareholder return for the performance period is negative.
And broadening the company's scorecard with enhanced focus on financial metrics.
We have an independent and engaged board with a healthy and ongoing refreshment process.
Since 2019, the board has added three new directors announced the retirement of two long tenured directors named a new independent Board chair appointed new chairs to three of our committees.
At year end average board tenure was approximately six years compared to the S&P average of 10 years and in early 2020. The board retained an independent consultant to help the board consider its needs not only for today, but in the future.
Our board recently heightened its commitment to provoking greater diversity by amending its director recruiting guidelines to assure candidates of gender and racial or ethnic diversity are sought out and included in our search process something that is commonly referred to as the Rooney rule I'll now turn the call over to Greg to cover some of our operational highlights.
Thanks, Doug.
From an operations perspective, 2020 was one of our best years ever we made step changes and cost reductions and efficiency gains across all our assets are fourth quarter, well cost set new records across the portfolio and our 2021 cost will be at least 20% lower than our 2019 averages.
We continue to see strong results and consistent well productivity rates showing that our learning curve is far from over.
Our culture of continuous improvement and innovation is unique and creates a competitive advantage, which is not easily replicated.
The ability to lead in every basin, we compete in defines us as a world class operator, our multi basin portfolio allows us to rapidly transfer new ideas across the business to get real time results.
Example of this is the rapid implementation of simulcast across the company, which will be implemented on more than 80% of our 2021 program.
The Pie chart depicts our upstream free cash flow by asset for 2021.
This demonstrates the breadth of the portfolio and contribution to free cash flow across all of the assets.
<unk> of our portfolio.
Cost reductions last year were driven by gains in a number of areas, including completion efficiency using Simon fracking wet sand faster drilling and completion times optimized wellbore designs and adaptable service provider contracts.
Our cost savings are expected to be highly durable through cycle and are related to innovation and process changes that drive down cycle time, not simply lower service costs.
In 2020, the Permian team delivered dramatic well cost reductions alongside strong well performance there.
It was an interesting slide in the appendix today that shows how we make todays pacesetter Tomorrow's norm.
Our cube approach continues to demonstrate value and support efficient execution of our acreage.
One example of this operational excellence is where we have drilled 55 wells without a sidetrack.
That's 1 million feet of drilling.
Fourth quarter drilling and completion costs per lateral foot were $470 down more than 30% compared to our 2019 average D&C cost.
We plan to spend roughly $600 million to $650 million to run three rigs in the Permian in 2021.
And stack.
Not only did we deliver a new pacesetter cost, we also drilled and completed five wells under $4 million, that's half of the new fields of legacy well cost.
We also demonstrated that this efficiency works in the Scoop, where we completed six Springer wells with record drilling pace and basin leading cost.
These wells averaged $6 $1 million in D&C costs, nearly three and a half million dollars lower than our January 2020 guidance.
Although the majority of our 2021 program will continue to be in the stack, we will have roughly 15% of our development in the Scoop Springer.
The Anadarko will be the largest contributor contributor of free cash flow and our company for the third consecutive year, we plan to spend roughly $300 million to $325 million to run two rigs in the Anadarko in 'twenty and 'twenty one.
We have delivered on our promises in the Anadarko cutting costs and making the economics compete for capital in our portfolio.
This is a great story of how we've used and proven practices to rapidly change results.
The tremendous cost reductions we've achieved in the Anadarko really have changed the game for the returns it generates.
It's important to realize that although the D&C cost reduction is significant it isn't the whole story in the Anadarko, we have seen cost savings across the entire supply chain, including an estimated 20% reduction in facility costs for 2021 and.
And then 11% reduction in year over year operating expenses now at a very low $2 per barrel of oil equivalent.
It's not just a cost story, we're also innovating to make better stack wells as many of you have noticed we continue to evolve our completion designs, which have led to very strong production results and our recent wells.
We expect our 2021 program in the Anadarko to deliver a 65% internal rate of return.
This asset not only competes for capital, but it is a significant driver of our deleveraging plans in 2021 with the highest expected free cash flow generation of any asset in our portfolio.
In the Montney, we demonstrated even lower D&C cost.
About 85% of our wells were completed with Simon Frac in the fourth quarter, and we averaged 19 and a half hours of pumping time per day up 25% from 2019.
Fourth quarter drilling and completion costs were $3 and $380 per lateral foot down 25% compared to our 2019 average and we've now drilled wells at less than $300 per foot.
When combining with low royalty rates and low operating costs. This asset delivers great returns on the capital we invest.
Our 2021 program will be largely balanced between the Cutbank ridge portion of the play in British Columbia, and the Pipestone portion of the play in Alberta.
We continue to see benefits from the Pipestone processing facility that came online late last year.
We plan to spend roughly $375 million to $425 million to run three to four rigs in the montney.
I'll now turn the call back to Doug.
Thanks, Greg.
We've been at the forefront of the shift to the new E&P, we've been describing our approach in delivering on this model for several years now before opening it up to your questions. Here are a few key takeaways first we're incredibly clear angel best create shareholder value today and that is to reduce debt.
Amongst many attributes we believe the new E&P must have size and portfolio diversity for future success, we have that today and are well positioned to prosper.
Oh Vantiv has been at the forefront of our industry's transition to the new business model. We are focused on generating free cash flow and delivering quality returns. We've done that for the last three years and are well positioned to do that again in 'twenty and 'twenty one.
200000 barrels of crude and condensate production and roughly 540000 barrels of oil equivalent per day of total production. We clearly have the scale to be an industry leader in efficiency risk management and innovation to generate free cash flow and deliver quality returns in fact, the rationale for much of the recent.
Consolidation across the sector has been aimed at creating the scale we already have.
We have a we have proven that multi basin provides a sustainable model to manage risk our world class core three assets, the Permian Montney and Anadarko provide operational and commodity diversification cross based on learnings and more than a decade of inventory at our current development pace we have.
The proven ability to drive leading innovations and generate significant free cash flow, our operational execution and sophisticated risk management, our differentiated our teams did a great job of safely reducing costs in 2020 and their efforts have set us up for a very strong 2021 finally, we remain committed.
Added to returning cash to owners, we have a track record of doing so it's how we are running the company our near term focus on reducing debt is the best value add for our shareholders day.
Thanks for listening to our prepared remarks, and operator, we'd be happy to take questions now.
Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star one.
We will now begin the question and answer session and go to the first caller from Jeanine Wai of Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking my questions.
Good morning.
My first question is on 'twenty and 'twenty two I know, we're getting a little head here, but the plan is the whole day maintenance mode through the end of next year at the 200, a day do you have any kind of directional commentary on what capex from 'twenty two could be relative to this year and I know theres a lot of moving.
Pieces of inflation and divestitures, but it also looks like a lot of the efficiency gains that you achieved in 2020 are very start Sean.
Yeah Jeanine great question.
First thing I'd say is it is a little early but I will tell you that first to achieve that four and a half billion dollar a.
Debt target, we've built in no additional efficiencies beyond what we're delivering today and then in 'twenty 'twenty, one and it's a little early to guide on capital, but I would expect it to be similar to this year as you've seen we've been running at a fairly level loaded program actually for several quarters now and I expect us to be able to maintain if not.
Improve that capital efficiency. So don't want to give you a precise number but I think it'd be very similar to what youre seeing this year.
Okay, great. Thank you.
My second question is just from the divestiture side can you talk a little bit about what your criteria is for example are you thinking about outright sales or are you open to JV structure, then should we be thinking about potential candidate does primarily being the base assets or are you potentially.
Considering any longer data inventory sales from any of your core three please.
Yeah, you know obviously today, we're very pleased with the announcement on the Duvernay because that takes us more than a quarter of the way towards that target. We have a number of pathways to finish on that program.
But I don't it doesn't involve our core assets, we have a number of options here as we do it in and know where we're not looking to.
To partner as part of that process.
Next question comes from Brian singer with Goldman.
Goldman Sachs. Please go ahead.
Thank you good morning.
Good morning, Brian.
If if we net out the asset sales and asset sales objectives, you're projecting about a $1 $4 billion or so in debt reduction through 2022, and I think you mentioned you see a $1 billion instead of a free cash flow. This year or are there any reasons why it similar oil prices 2022 free cash flow should be.
Be meaningfully lower than 'twenty, one either the need to ramp up capex, which it seems like in response to Jenny's question, you said not that or any loss of free cash flow associated with assets being divested in the net.
If not could there be upside to where debt reduction could end up by the end of 'twenty two.
Yeah, Brian there Theres a number of upsides to this and you know clearly we announced that the $1 billion target I think it was in may of last year, and obviously, we've almost before even the announcement today on the Duvernay had already achieved about a half a billion of it.
The other thing I'd just highlight here is the price deck used associate with that target is $50 W. T I and $2 75, Nymex. So clearly one of the upsides as if we see price of similar or do we see on the screen today that that means we're going to get there even faster the other thing I'd just highlight.
Is as you know we've been working quite hard for a number of years now to limits and eliminate some of these legacy costs, which which actually don't add any value of just taking value away from us and.
And we have a tailwind from that coming for 'twenty 'twenty. Two so the last of the pursuit cost, which is the lease payments in this year and that'll be an $80 million tailwind as we go into next year. So I think there's a great chance to deliver very similar free cash flow at the same price deck.
And in 'twenty two is 'twenty, one we'll need to see the net effect of any divestments from today's announcement on the Duvernay. Its only 10000 Boe's a day solicit less than 4000 barrels a day of liquids very modest cash flow.
So it's it's not a really material to.
To the cash flow side of the equation, but it clearly is material to the debt side.
Great. Thank you and then my follow up you discussed the resiliency of your drilling and completion cost reductions was notable in the fourth quarter relative to the first three quarters of 2020 at your 'twenty. One plans base case, most but not all of the reductions <unk> seen during the fourth quarter can you talk about the upside risks and downside risks.
Achieving that D&C cost targets that you've highlighted in the Permian and Montney and Anadarko for 'twenty one.
Yeah, Brian Great question, I'm kind of I'm looking over at Greg right now kind of smiling because youre going to help me set new targets for them here, but you know you can see from the numbers, we presented that we're not baking in better performance than we actually delivered in the fourth quarter.
So clearly the team's focused on upside, but maybe Greg you might just highlight what's been driving some of these efficiencies and any risk you're concerned about 'twenty. One yes. Thank you Doug Yeah first off we're really proud of the accomplishments of the team in 'twenty 'twenty and we saw great efficiencies of one real example of that was how we rolled out Simon.
[noise] Frac that as you know started in the Permian and we move that.
Technology up to the Anadarko and up to the Montney and used it in essentially all of our plays and that's going to be a big part of our cost reductions going forward that along with some of our somehow designs and changed Wellbore architectures are going to allow us to drill our wells faster and complete our wells faster and as you know time is money in this business in an unfortunate thing is those are all strong.
Actual changes in those so those should be durable over time.
We will see some headwinds on certain commodities, such as diesel or in Q.
<unk>, but we really have always counted on our efficiency gains to offset those inflationary pressures. So we feel really good about what we've accomplished in 2020 and that strong tailwind at the end of the year just makes us more confident in our ability to deliver on 2021.
Yeah.
The next question comes from assets at Bank of America. Please go ahead.
Thanks, and good morning, I have one for Doug and one for Corey Doug.
You've been very clear on your capital allocation framework now once you achieve or attain your debt level. Just wondering your thoughts on the three options of returning cash to shareholders growing fixed dividend, how do you feel about variable dividend and then share buyback.
Yeah.
And by the way it said I appreciate the confidence you have on hitting that $4 5 billion dollar target by asking us to get even farther than that but look right. Now you know we've been very clear for a long time that we think the base dividend is an important part of the offer to shareholders, particularly in an industry like ours.
As we've said as the cash flow and the cash flow at modest commodity price estimates grows the dividend should grow alongside it beyond that I think we need to see as we get closer to then which are the best options to return cash to shareholders and everything is still on the table, but we have a bit of time to think about that and I understand that.
Use of shareholders as we get there, but I I can promise you the base dividend will be a big piece of that offer.
Right.
And Corey you you highlighted confidence and dealing with the upcoming debt maturities just wondering how does asset sale fit into the equation you did duvernay and you have Eagle Ford on the Hopper.
What else is baked in that confidence and then.
The Rex contract can you remind us when that rolls off.
Yeah, Hey, good morning, I said so in terms of the next two maturities, it's just over $1 1 billion.
It's <unk>.
If you think about the free cash we talked about this year plus the.
$250 million from Duvernay, that's more than enough to deal with both of those so that's really the confidence in dealing with the next two debt maturities and really part of the commentary there is the acknowledgment that we want to reduce overall debt and not just refinance and extend even though those rates are a lot better than they used to be so.
And I guess.
Your second question was Rex maturity when does that roll off.
Yeah, Rich do you want to pick that up sure.
<unk> often in mid 2024.
Okay.
The next question comes from Greg Pardy at RBC capital markets. Please go ahead.
Yeah. Thanks, Thanks, good morning.
Doug I wanted to come back just to the dispositions and I know there's been a couple of questions on it already.
But it's unusual for you guys to to layout of a targeted disposition number.
And I'm just wondering if you can frame that a bit maybe in the context of what the A&D market is looking like right now in your eyes.
Yeah, Greg.
It is a little unusual and you know the details on that we as you know we never talk about.
Assets that we may be selling until we've got a PSA in her hand, and a deal in place and but in this case is you know we have a lot of dialogue with shareholders ongoing and I think we have and you've seen the market response to the incredible support.
For maintaining scale and reducing debt as priorities of the company and laying out the 1 billion, but the the request we constantly get is as you know.
That they know we've acknowledged that level still is higher than we wanted so where are we aiming and when could we get there and one other things that did concern us as many people that were modeling our company didn't believe we could get to something like a leverage ratio of one five times at a modest commodity price, it's something like $50 a barrel until.
'twenty three or even 24, so we felt it was important to give that guidance because when you add that to reinvestment ratio of 75% or less it gives a clear picture of the future. So that's that's why we laid it out we felt the market needed to understand not just what we were going to do in 'twenty, one, but when we would get to that.
Target on.
On the A&D market and you've seen quite a bit of activity. What you really need we've talked about this for a long time is when prices are quite volatile it actually tends to put a pause into that market because buyers and sellers' fundamentally need to have some form of alignment and how they see the commodity within a reasonable range.
Otherwise getting to a deal is difficult with the strengthening in the stability we've seen over the last several months you've seen that come up where we're very pleased.
With the deal we've got with Pat and his team, which it's a strong asset I think it will make a great foundational asset for them and of course, we also saw another announcement on the Duvernay yesterday, as well, which I think was a strong result, so I think that shows that market is coming back there is capital to be deployed.
Both from Strategics and from Privates, which is great to see because that's part of a healthy sector.
Okay. Thanks for that and then the second question is really shifting gears, but obviously, a big changes in terms of governance and compensation and so forth does that mean that or should we read this as direct stock ownership.
Amongst management and directors moving into sharper focus as opposed to just you know at the L. T ice a settlement.
Yes, Greg you know what I'm getting at right. Yeah. It is it is and but this is more complex than I think some people make it out I mean, there's there's a great deal of views here one of the things I'd just highlight the the LTI settlement in shares is something.
We established a because you have to put this in your program way in advance. So we started working on this three years ago. So this year is the first year, because we had a shareholders passed an omnibus plan for US I think it was a year ago, which allowed us to do that so these changes have been and where it worked for quite some time.
But of course, we also have to recognize that that shareholders I mean, the board and and management and in fact all of our employees.
Suppose to the equity performance of the company, there's a great deal of alignment the majority of our executive comp is in is in share based units.
So they benefit when the shares are strong and they they see the downside, but this further reinforces that its a practice. Some follow we believed it was the right thing to do was to share settlement and this is the first year, we're able to do that but we put the program in place several years ago.
Yeah.
The next question comes from Neal Dingmann at two Securities. Please go ahead.
Good morning, Doug My first question for you or Greg as centers on the Anadarko Basin specifically.
You've got the plan I think in the slides the two rigs one five frac. So I'm just wondering could you talk a little maybe about cadence or specifically.
You're thinking about targeting I like the returns both from the stack and Scoop. So just wondering how you're thinking about targeting those plays this year and into next.
Yeah at a high level I think first I'd, even take it up a level it because I know some people are wondering about the cadence of activity across the company over the year because for a number of years. We were front end loaded we wear it it's incredibly level loaded in other words almost take capital divided by four.
And it's at a pace of activity, we've now been running for a while starting in the third quarter of last year and all the way through the fourth quarter.
And that's largely true right across the asset base, where we're are doing activity, but Greg maybe you want to pick up the split between kind of stack and Scoop Springer.
Certainly in it and just to reinforce doug's.
Doug's comments, there around level loading will be level loaded in the Anadarko.
As our other assets as well as I said in my prepared remarks about 15% of the program will be down in the scoop. So while the remainder will be in the stack and we feel like with two rigs. We can we can run those all year long and very very efficiently develop that asset as I said in my remarks, it's throwing off more free cash than any of our other assets in the portfolio.
We're seeing really strong well results and the team continues to impress with a lower cost that we've seen not only in the stack, but down in the scoop now so feel really good about what we're accomplishing in the Anadarko.
Great details, Greg and then a follow up could you sort of you're already getting Doug again, just on that slide 11, it's really interesting on the performance of just the improving sort of D&C. Mike. My question is around the Permian and that slide could you talk a bit more just on sort of scale size and scope of that.
<unk> and including sort of the simoes practiced and I'm. Just wondering is there more to go in.
Could we see it you know well the slide another year from now we'll continue to show that kind of dropped like you showed from fiscal.
Fiscal year 19 through end of 'twenty two through end of 'twenty I get very nice performance there from just wondering.
Is it is it was there more to go there based on what you can do on size and scale, etc.
Yeah, Let me add a couple of comments and let Gregg also jump in here first of all I just want to reinforce the point Greg made.
The Anadarko at our at our 50 to 75 price deck is going to generate more than a half a billion dollars of free cash flow this year, and I'll kind of repeat that for than a half a billion dollars of free cash flow this year and still be the second largest producing asset in the company and it shows what we've been able to do.
With efficiencies there and we should also highlight Greg mentioned in his in his comments that we're talking about operating cost of $2. A BOE a day. These are incredibly low numbers compared to many plays in North America I think on on the Permian and elsewhere, just one comment I'd make and what Greg to jump in here, but.
This the simultaneous I mean, we all talk about technology, and we have images, sometimes of huge amounts of complexity and digital and all sorts of things.
You know this this idea of simulcast is incredibly simple and it's one of the biggest improvements in a number of years. We've seen inefficiency are in our business and so it just shows that innovation, sometimes isn't all that sexy. Some of it is just thinking this is really about plumbing is what this was really about and the other.
The comment I, just make sure I heard it to Greg is one of the things. We're most proud about we first did that in the Permian and literally weeks later it went right across the company.
This is something I think it's pretty unique to US is that we've got this culture of innovation and we've got this culture of teamwork work, where the various operating games, because we have an asset based structure, where they learn from each other they learn from our competitors, but they're constantly trying to drive better results. So so at a very.
High level without setting Greg targets for 'twenty 'twenty two I, absolutely believe we will have greater efficiency next year than this year, but but Greg.
Yeah. So thanks for that lead and Doug just to build on first the comment around sort of a question around sawmill Frac I think it's really important to remember that when we're using sowell frac, where fracking two wells at the same time, but we're not changing the scope, we're still pumping similar fluid similar sand rates per foot and pumping at a similar rate per cluster into the well so youre seeing.
The same intensity downhole that you would if you were fracking those wells independently. So the scope of our jobs is not not changing shifting to the continuous improvement I mean, we've we've established a culture of continuous improvement here at the company. So you're not going to ever hear me sit here and say that we're done where we've done the best that we can do in there.
Things aren't going to improve so I'm not ready to set new targets here on the call, but I do feel like the teams will continue to innovate will continue to bring out new ideas and we'll continue to have new things that we bring forward and talk about and I think the company and the asset teams will continue to get better and better over time.
Okay.
The next question comes from Josh Silverstein at Wolfe Research. Please go ahead.
Yeah. Thanks.
Hey, guys just following up on some of the questions comes there on the Anadarko Basin, you mentioned, how much free cash flow is going to be getting this year and yet the allocation is half of what the Permian is getting can you just walk through why that's the case why you are taking capital from your best free cash flowing assets and putting it into two and other asset.
Yeah, Josh you know we've talked about this for a while the other good news in our portfolio as we have strong returns right across the portfolio.
So we don't feel like as we distribute capital across the asset base.
Debt, we're actually trading off returns is to do that but as you've seen we've seen it again with these weather events. This week that there is real risk based benefit on having a multi basin portfolio, obviously operations in Texas have been impacted but other assets in the company or.
Full steam ahead today I should just mentioned by the way because I know, it's a big topic, we're already bringing production back online in parts of our Texas and Oklahoma operations, but the areas outside of those were not impacted by this weather and have continued to produce strongly and the the full impact of that I do not expect it to change our guidance for the year.
That will be the approach, we take but I'm confident we'll find our way through that so so I think as we think about allocating capital.
We do need to allocate capital across our core assets, otherwise, we aren't a multi basin company and we're not extracting the full value from it and of course. It also allows us to get these other benefits of shared learnings.
The learnings don't just come from the Permian they come from across our asset base and are quickly spread so when we look at the total company result, we feel very comfortable with it and it's also consistent with our risk based approach to multi basin.
Yeah. Thanks for that and then I do appreciate that the changes on the.
The compensation structure as well I was hoping maybe you can provide a little bit more detail just around some of the targets in there.
You know you mentioned free cash flow and debt reduction is going to be the annual numbers here what are the targets for that I am just curious if they're the same as the $1 billion free cash flow level of billion dollar of debt reduction that you guys are looking at them. So I'm just curious if you're able to provide some more detail there.
Yeah, just make couple of comments here first.
This goes back I think seven years ago now, we we radically simplified our scorecard for the company. So we typically only have four or five measures.
And usually we only have one operational measure the all the rest are financials and that's been in place for a long time.
Than what we actually work hard to do with the board.
Is align the annual incentive the bone the bonus scorecard, not only with the objectives that particular year, but they need to be also linked into the longer term there needs to be some connectivity.
So yes, there there is strong linkage in all of those measures to the guidance. We've given you today, that's where it is the other thing I would do I would say here.
Because there has been a lot of dialogue for several years now with investors about bonus payouts across the sector and our board working with their compensation consultant did a piece of work last year.
Which actually showed that our sector did have a bias to pay out more than target compared to the broader marketplace.
And that was just fact, it's just analytics is just data are and what they did is we've taken that on now and it substantially enhanced the rigor because you just can't deny it that our industry paid was not was paying higher than typical bonuses for the broader marketplace, which says something about the rigor and toughness other.
Those targets. So that's now been built in so to for us to achieve better outcomes, we have to even achieve better performance and poor outcomes will actually receive less reward I think that's all very healthy and I think it's recognition of of just actually taking a broader look and not just looking across our sector, but looking at the broad.
Other marketplace.
The next question comes from Richard Tullis of capital One Securities. Please go ahead.
Hey, Thanks, Good morning, Doug and the team congrats on a good quarter.
Interesting free cash flow a pie chart on slide 10 of the presentation using the $50 oil and 275 net gas.
Net allocation change using something closer to current commodity outlook for 2021 say $60 oil I'm guessing that the base contribution maybe gets a little bit larger given now the highest overall oil mix there.
Yeah, I don't have the exact details, but I can tell you in total I think Corey mentioned this as well that you know at the 50 to 75 debt, we expect to generate around $1 billion of free cash flow. This year at the current kind of strip you see that number jumps to almost one $5 billion.
So that so we clearly have access to the upside, but given the shape of that curve, it's going to be more weighted towards the oil assets in the gas assets, because there's clearly a about a $10 difference in the strip on oil and a smaller difference about 2020 to 30 cents on gas so you're going to see the oil your assets do a bit.
But I don't have the exact split for you.
Okay, that's fine and.
Kind of just keeping with the theme of comparing the different areas you discussed the highest rate of return for the Anadarko basin assets are on $50 oil how does how do those assets kind of rank using $60 oil and say $3 gas.
Yeah, they're there they actually kind of floats all boats here actually it it moves a little bit around because the other thing of course is I know you know basin deaths play a role in here and Oh of course, the nice thing about our portfolio of the the three core areas received very good pricing.
I haven't talked about it a lot on the call, but you probably have noticed we've been receiving W. T I plus for condensate in Canada. This year, and then of course, our Permian and Anadarko assets are very well positioned in the market and with our transportation agreements. So.
So you have to look at it carefully but I think the thing the thing I would stress here is it's not just about the price at the moment because obviously when you make these investments you. The return isn't just what happens in the first few months, it's over the life of that investment and I know that there's been a great deal of talk over the last six months about natural.
Gas prices and we were fairly optimistic for 'twenty 'twenty, one, but we actually think that it's very difficult for the market to break out a much different than we actually see longer term in that price deck. We're using for this year. So it isn't just the price on the screen at the moment that we have to think about it.
About where there are where they're headed and I guess the last point I think you know not only are one are we one of the largest crude and condensate producers one of the largest natural gas producers and we also produce 80000 barrels a day of Ngls and.
You may have been watching prices of propane, which had been very strong for quite some time now.
Yeah.
Our final question comes from Noel Parks at Tuohy Brothers. Please go ahead.
Good morning.
Good morning.
Just trying to.
Follow up to some of them from what you're talking about on the gas environment.
If we look kind of bigger picture and I definitely heard some commentary that.
A lack of liquidity in the in the further out amongst the strip.
Months and years.
It sort of under understates the the demand drivers we have ahead.
Do you think we are more in a time.
Looking toward.
If anything.
Especially as as you delever.
Hum.
Letting more volumes go go out to the start to the spot market.
As a as opposed to hedging.
Or are we more at the and other spectrum where.
You know this is the time to be thinking about incremental long term gas agreements gas purchase agreements for example.
To support further growth in LNG.
Kind of looking at you know just a year or two have had spot world are we looking at more transitioning to five 510 year locking in those sorts of.
Those sorts of arrangements.
Yeah.
You know, it's it's a good question the.
You're back to.
To the fall of 2013, when we laid out our strategy and we said that there were four things. We felt were crucial to have a sustainably strong performance in this sector and I'd highlight that one of those was markets and fundamentals that.
Need to think not only you obviously have to have quality assets. If you don't have quality assets, it's very difficult, but you also have to think about your access to markets your commitments and cost to access those markets and the risk you take with them and that's been built into our thinking all along so we're gas goes the the the dilemma here in North America as there's a.
Deal of low cost gas there is a huge amount of low cost gas.
It's been great to see the export markets grow I think we were at about 11 Bcf a day of LNG leaves the coast. We're about six Bcf a day it goes into Mexico, that's massive growth, but despite that it's been difficult to move the domestic price in there.
Reason for that is this industry is really good at finding and low cost development of natural gas, which is what we think binds the price.
The LNG market as we've seen it has got new volatility in it because of this 11 Bcf a day so in our in the past you've might have felt like accessing some of that market could provide upside but of course last year. It was just the opposite it was considerable downside.
As affect whether it's something we look at them carefully but I think we also have to be careful that normally those agreements retire require long term commitments.
The hardest part about prediction is predicting the future and so we just have to consider that risk, but it is something we do talk about and look at on a fairly regular basis.
Gotcha. Thanks.
And.
I apologize if this has been touched on before but I wonder if especially after we've seen sort of in this extreme weather that kind of brought up force how to a ton of industry activity across multiple basins.
Have we finally hit the trough would you say and in service costs at this point and I was wondering in and your reserve assumptions both on the the five year SEC rule on on Capex or and just what you've embedded.
And in the PV 10 from operating expense assumptions.
Did you assume a flat.
Flat service service materials cost scenario going forward or did.
Could you turn to putting in some inflation there.
Yeah, what we actually did is assume we're at a total cost of the wells that would be the same as today.
In some areas. We know for instance diesel costs are going to go up as the price of oil goes up and Greg also mentioned steel.
But overall service cost I think if you look back at 15 and 16.
Obviously the industry recovered strongly in 17 in.
<unk> thousand 18 and 19.
But service costs really Didnt go up significantly in fact in many cases, they went down because I think one thing.
We forget about is just like we try to drive our efficiencies and reduce our costs provide more efficient operations. The service guys do that too, but as Greg said, even if there is inflation. There. We're confident we can deliver on those numbers because the biggest single driver for US now going on almost eight years on cost reduction has been a bit.
Innovation, it's been constantly innovating on how we drill and complete wells I mean, the idea that we drill some of these wells in five or six days. We're now completing almost a mile of a lateral in 24 hours. These were unheard of just a couple of years ago and those arent service cost related that's the execution and design of the activity.
And I do not believe that will quit a I know, it's not going to quit here, but I don't think it'll quit in the industry. So the short answer to your question is we've assume same well cost in next year as this year in net debt target the exact mix of what our innovation will do for savings and any cost inflation, we believe that.
That's actually a safe estimate because also our numbers this year in our budget are slightly higher than we delivered in the fourth quarter. So we've actually been at lower costs and that would be used in that planning forecast.
At this time, we have completed the question and answer session and we'll turn the call back over to Mr. Campbell.
Thank you operator, and thanks, everyone for dialing in today. We appreciate your questions stay warm stay safe and we look forward to seeing you soon.
Yeah.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.