Q2 2022 Ovintiv Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to you.
2022nd quarter results conference call.
As a reminder, today's call is being recorded.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session members of the investment community will have the opportunity to ask questions and can join the queue at any time by pressing star one for members of the media attending in a listen only mode today.
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Please be advised that this conference call may not be recorded or rebroadcast without the express consent of <unk>.
I would now like to turn the conference call over to Jason Voorhees from Investor Relations. Please go ahead Mr. Hayes.
Thank you operator, and welcome everyone to our second quarter 'twenty two conference call.
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 on SEDAR and Edgar.
Following 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 CEO Brendan Mccracken.
Good morning, Thank you for joining us.
Our second quarter results highlight our execution across the business demonstrate that our strategy continues to generate superior returns.
We are focused on both the returns on the capital we are investing in our business.
And the cash we are returning to our shareholders.
Our results reflect our unique combination of strengths our innovative culture, our relentless focus on capital efficiency.
Top tier assets and our disciplined capital allocation.
That combination of innovation and discipline is showing up in our numbers as we make sure higher prices flow through to higher returns.
Few minutes Gregg is going to highlight how our innovation has this leading on several technologies that are the key drivers of returns today.
Bottom line is that our capital efficiency has us generating $400 million free cash flow. This year than if we were performing at the average of our peers.
By the way that analysis uses a high quality group of seven of our peers and is done on a 20 to one.
Ratio, which is conservative for us relative to the 12 to one ratio the current spot places reflect.
With Greg covering the impact innovation is having on our results Corey is going to share how our disciplined approach has us positioned to maximize our margins we've added to our market access for our Montney production.
And 80% to 85% of our Montney gas is priced outside of <unk> through 2025, when LNG, Canada is set to be on stream.
We delivered our highest quarterly free cash flow highest quarterly cash flow and free cash flow and more than a decade. This strong financial performance is translating directly to our shareholders with increased cash returns.
Earlier this quarter, we announced the doubling of shareholder returns to 50% effective July one we delivered this increase ahead of our original guidance due to tremendous balance sheet progress and strong underlying business performance.
With this increased return profile will return almost $400 million to our shareholders in the third quarter and over $1 billion for the full year.
Assuming current strip pricing, we expect this amount to more than double next year.
In addition to our increasing cash return profile I'm excited to highlight strong underlying operational results. We achieved the high end of our oil and condensate and total production guidance beat consensus cash flow per share estimates and achieved free cash flow generation of $713 million.
Our full year Capex guidance remains unchanged. Our team has put in long hours to find creative and innovative solutions to the supply chain and logistical challenges facing industry. Today. It is through this thoughtful innovation that we're able to maintain our leading capital efficiency versus peers and maximize the value we're creating for our shareholders.
Over to you.
Theres no doubt as shareholders, we benefited from a dramatically improved capital structure with less debt lower interest cost and less financial risk.
The exciting part, though is the dramatically increased capacity to directly returning cash to our shareholders. We announced in early July that we would increase the return of free cash flow from 25% to 50% each quarter and thats on top of a nice base dividend.
This jumped to 50%, we will deliver almost $400 million back to shareholders through buybacks and base dividends in the third quarter alone.
This return is substantial and equates to over $1 5 billion on an annualized basis or a 13% cash return yield this cash return yield more than doubles to 27% when removing the impact of our hedges.
Speaking about hedges today, we are less than five months away from realizing the benefits of our refreshed hedging program. The roll off of our 2022 hedges and right sized 2023 program are set to generate a meaningful step change in cash flow as we head into next year.
Our return profile has further upside potential as we eliminate additional costs from the business and continue deleveraging.
Over time, the business has the ability to increase returns beyond the 50% level as outlined in our capital allocation framework.
Finally, and worth noting our cash return offering is underpinned by our sustainable and growing base dividend, we kept our base dividend intact through all of 2020 and have now raised at three times or over 250% in the last 12 months, including twice this year alone we.
We see our sustainable and growing base dividend is a core component of our value proposition for shareholders. We currently have a base dividend yield of about 2%, which is very competitive across the industry and the broader market.
We continue to make significant progress in lowering the overall debt level and our capital structure.
We reduced net debt by $610 million during the quarter to $3 9 billion.
In addition to net debt reduction we are taking a proactive approach to reducing our absolute debt and the interest costs that go with it lower interest costs create additional room for base dividend increases over time.
In June we completed the redemption of our 2024 notes, which totaled roughly $1 billion. This redemption will generate about $55 million in annual interest expense savings.
We have also been actively pursuing open market purchases of our senior notes repurchasing approximately $60 million through the first half of the year. We will continue to be opportunistic on this front going forward as higher interest rates lower the price of these notes.
Our strong business performance has generated trailing 12 months adjusted EBITDA north of $4 billion.
Driving our current leverage ratio of two one times at the end of the quarter.
Even after increasing cash returns to 50%, we still expect to reach our $3 billion net debt target before the end of the year. We also see the opportunity to continue to reduce net debt below $3 billion.
This bolsters the resiliency of our business and positions us to withstand market volatility over the long term Greg will now cover some of our operational highlights.
Okay.
Capital efficiency continues to be a key focus for our asset teams across the organization, our proven track record of industry, leading efficiencies and strong culture of innovation are truly differentiating in today's volatile commodity and macroeconomic environment.
No matter, how you cut it our 2022 program continues to rank top tier among our peers.
We compared our capital efficiency does that of seven of our closest competitors, whether you measured on an oil and condensate production basis or using total production on either a six to one or two to one basis, we are delivering more barrels and more boe's for less capital.
This leadership translates to real money.
If we were to assume our peer average for capital efficiency, we would have to invest another $400 million to deliver our two.
Our 2022 program.
Put another way, we are driving an incremental $400 million of free cash flow generation this year.
That we are returning to our shareholders.
As volatility and inflationary pressures continue to challenge our industry, we are responding with innovative solutions to make our business stronger and position us to excel on the road ahead.
Our culture of innovation is something we take great pride in and we see it as a real competitive advantage.
Innovation is more than simply applying the latest technology to our operations. It is embedded within the culture of our organization at.
It influences the way, we approach challenges and manage complex operational objectives.
It's not something you can buy is something that must be cultivated over time and it is delivering tangible results.
We are an industry leader in several key categories, including <unk> wet sand drilling speed supply chain and logistics management.
Today's inflationary environment. These are the categories that matter most.
Our outstanding performance here is driving the strong capital efficiency you see in our business today.
Our onsite staff.
In storage solutions in the Permian is a prime example of our innovation at work.
To overcome sand hauling delays in the first quarter, we piloted an industry, leading onsite wet sand storage system.
This reduces trucking bottlenecks and is generating record completions efficiencies.
This solution was made possible by our stacked innovation approach.
By combining the use of multiple innovations.
Frac sand in house logistics, and onsite stands San storage.
We've been able to achieve top tier completion efficiencies completing over a mile of lateral feet pumping over 16 millions of pounds of sand in a single day.
We are confident in our ability to continue generating superior asset level returns as we push the frontier of innovation and capital efficiency.
In addition to our continued strong well performance the second quarter saw a step change operational efficiencies.
These efficiencies are a key factor in managing inflation in today's environment.
In the Permian, our top tier completions performance delivered a 20% improvement in completed feet per day versus the 2021 average.
Our pacesetter in the play came in at nearly 5500 feet per day.
In the Anadarko, we continue to achieve strong drilling results with a record pace setter of more than 2800 feet drilled per day.
Our second quarter average drilling speed was 20% faster than the 2021 average.
And finally, we continue to see drilling efficiency advancement in the Montney.
We set a new drilling pacesetter in the quarter, achieving nearly 2800 feet per day.
On average we were 7% faster than our 2021 program and we are drilling our longest laterals ever up 9% from last year.
These new pacesetter results reinforce the continued efficiencies our teams are striving for and achieving everyday.
I'll now turn the call back over to Corey.
In an inflationary environment with supply chain constraints, the benefits of higher commodity prices can easily be lost higher costs. We're.
We're not letting that happen.
We've managed to keep about 90% of the increase in commodity prices over the past year. Our margin expansion continued in the second quarter with a realizable margin of 74% up from 62% a year ago. This margin represents our realized prices price before hedges less our cash costs simply put over the.
The last 12 months, our average realized commodity price went up by about $30 a Boe.
While our cost increased by less than $4 a Boe.
When we look at our strong price realizations, our marketing team has done a great job in not only securing market access, but also ensuring we have a diverse portfolio of sales points for our products, our second quarter unhedged realized price for oil and condensate was 99% of <unk>, while our unhedged realized natural gas price was 95% of <unk>.
Max.
One way, we expand margin is by taking an active role in enhancing market access across the portfolio work, we've been at for over a decade.
In the Montney, we recently acquired transport for 245 billion Btu per day to the Chicago market.
This additional transportation adds to firm access we already have to markets in Eastern Canada, California, The Pacific Northwest in the Midwest. It supplements, our current portfolio of firm transport contracts and increases our montney natural gas price exposure outside of <unk> to approximately 80% to 85%.
This diversification is derived two ways first about 65% of our Montney gas production shift on pipelines out of the basin and delivered and priced at markets outside of ACO second about 15% to 20% of our Montney gas production is protected through basis hedges that transfer <unk> exposure to <unk>.
Next we executed those hedges at between $1 and $1 10 behind Nymex.
The additional egress to Chicago will slightly increase our <unk> expense beginning in the fourth quarter, but we expect the realized price premium to more than offset the cost I'll now turn the call back to Brendan.
Thanks Corey.
Uniquely positioned as a multi basin producer with significant fixed scale and three premium North American plays through our meetings with investors and analysts it's become clear that there is an opportunity to provide investors more insight into the value of our montney.
Our montney asset is on track to deliver more than $2 billion in upstream operating free cash flow this year.
With this in mind, we think it's critical for us to fully communicate the value of this asset.
Our returns in the play are among the highest in the industry, we drill everything from prolific natural gas wells with production rates over 30 million cubic feet per day to oil wells delivering more than 1000 barrels per day, we have significant scale in the play with over a decade of premium oil inventory and well over two decades of premium gas inventory.
We have the best capital efficiency in the play and we've drilled 13 of the top 15 Montney wells by production in the last year.
We invite you to save the date for our Montney webcast on September 19th we plan to have some of our Montney leadership team join us on the call, which will be followed by an interactive Q&A session stay.
Stay tuned for the formal details which will include in our news release in early September .
Before we move to the Q&A I'd like to sum up the key takeaways from today's call.
Our team delivered a strong quarter cash flow per share and free cash flow above expectations with capital below the bottom end of our guidance crude and condensate production at the top end of our guidance and total production at the top end.
We were pleased to accelerate the doubling of cash returns to shareholders by increasing our payout ratio to 50% of post dividend free cash flow in July .
As a result of that shift we're delivering one of the highest cash return yield offerings compared to peers and the broader market.
At 13% our cash return yield has been increasing is poised to continue to increase this year and poised to more than double as we head into 2023.
We are resolute in our determination to close the valuation gap between us and our peers. We are doing that today by using our strengths to maximize free cash generation and allocating that free cash flow to buying back our shares.
Finally, our unique culture of innovation and discipline is driving execution excellence positioning us as an industry leader across multiple key operational and technology categories.
With more than 10 years of premium oil inventory in over 20 years of premium gas inventory across our portfolio. We expect to continue to deliver superior returns on both the capital we invest in the business.
And cash returns to our shareholders for many years to come.
This concludes our prepared remarks, operator, we'll now take questions.
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 one moment.
Your first question comes from Arun Jairam with Jpmorgan. Please go ahead.
Yes, good morning, Brendon and team.
Brendan perhaps for you and Corey I wanted to get your thoughts around how you're thinking about capital allocation kind of next year, assuming the strip holds.
And just a thought is as you move towards your deleveraging target by the fourth quarter. So.
And you enter 2023.
How do you think about balancing.
50% are minimal return to free cash flow, how do you balance that incremental.
Cash returns beyond the 50% level versus doing more debt reduction or building cash on the balance sheet.
Yes, good morning, Arun. Thanks, Thanks for the Great question.
Maybe just take the first part first.
2023, clearly sitting here first week of August it's early in.
In the process, but our strategy for capital allocation in 2023 is going to be unchanged from today, we're going to be focused on maximizing returns free cash flow and cash flow per share.
Clearly, we want to look at several scenarios within that.
But both at the high high level of capital allocation, but also allocation amongst the plays in and products but.
What I would just say to give you a sense of how we're thinking about it the signals we're seeing today.
Probably bias towards another year of maintaining scale.
We would need to be convinced that any sort of modest growth would be clearly better on our risk free cash flow and cash flow per share outcomes and really theres kind of three things that we're evaluating to look at that Arun.
One is of course, just the market fundamentals is there a real demand call.
And then of course, our ability to maintain capital efficiency and returns.
In an inflationary environment is something we will look at and then of course for us.
Any investment.
In capital to drill wells must now compete the investment in share repurchases. So so thats a calculus that we've got to consider as well but.
Generally remember it's the first week of August so we're going to have more information as we go through the rest of this year on on those three items and we'll get more conviction with time.
On your second part there around.
How do we balance the allocation do buybacks versus debt reduction.
Clearly today, we are doing both at the 50% level, we wanted to see that continue to come down.
But we don't think net debt needs to be zero.
So you saw us double our shareholder returns earlier than guided.
The cadence of cash returns Ben been really clear through the year just as a reminder, we returned $120 million in the first quarter $200 million in the second quarter and now close to 400. This quarter. So there's a pretty clear pattern of what we're doing there.
And so our commitment is at least 50% and that's where it's at this quarter, but we've got the ability and optionality to do more than that if it makes sense as we proceed.
Great. Thanks for that answer.
Corey I was wondering if you could give us getting a lot of buy side questions on the impact of the M T.
On companies such as <unk> will have an advantage tax position. So I was wondering if you could maybe get your thoughts I do know it's subject to a three year average book income threshold of $1 billion or so.
So maybe you could give us some thoughts on potential impacts to cash flow and how this could impact.
What's the treatment on Canadian earnings.
Yes.
Youre right and thanks for identifying that as kind of a key feature to the to the whole language. The way. It's drafted but if you. It's a three year historical average to be above $1 billion right. So if you think about.
2023 that would be 2000, 2021, and 'twenty two we'd have to average a $1 billion for us.
As much as we don't want to remember 2020 that was when we had the pretty significant ceiling test impairments. So.
Net loss in that year is over $6 billion. So even though strong earnings this year, it's going to be hard for us to get to a position where it will be over that $1 billion. So for 2023, even if it's past the empty as written that shouldn't have an impact on us.
Obviously going forward 2024 that that could be a calculation that we would be subject to it and that would bring forward our tax horizon in the U S. Probably for about 2025 period it might bring it forward one year and you can kind of think about that as a prepayment of 25 and 24 from that perspective.
Yeah.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yes.
Appreciate you taking the questions.
First is just around regional gas basis.
<unk> added some takeaway solution in the Montney now, 80% to 85% of the gas is priced out of 880% outside of Wahaha, just talk about the way youre thinking about basis, and managing that risk and how you see it playing out from here.
Yes, thanks Neil.
Appreciate the question.
Really if you look at our strategy.
Across the assets, particularly on gas.
One of the things we like to do is make sure we get price diversification that we don't get.
Bose purely to the base and pricing and so you can see that play out interactions where we've.
<unk> in both the Permian and the Montney proactively to to move our gas outside the basin and get pricing outside of wall hub in the Permian and outside of eco in the Montney and so we're quite well positioned in both of those places, which is which is what we've highlighted here now so you've got the <unk>.
Right. So from 2023 to 2025, it's 80% to 85% of our eco gas or sorry, our montney gas priced outside of Echo.
And then for the critical 2023 period, when there could be a.
Basis pressure on Permian gas because of the lack of takeaway.
We've got that transport fully secured and priced outside of a great deal of it priced outside of the Permian. So.
That's helpful.
Brian could you talk about.
Capital efficiency is a huge focus obviously in the first quarter and you were able to maintain the capital spend.
For the year in this update just how are you thinking about that as you move into 2023, what are some of the moving pieces.
Around the components of inflation and how are you as an organization mitigating.
Yes, Neal appreciate it I mean, and there is really kind of two pieces that I think are important to highlight on on capital here. One is of course the.
The trajectory, which lots of investor focus on the trajectory of sequential changes, but the other piece that we've tried to highlight in the materials today is where you add on capital efficiency.
So it's one thing too and of course, we didn't change capital this quarter. So our trajectory is unchanged, but the other important feature is absolutely where we were.
Amongst the very best on capital efficiency. So the starting places is a great place as well.
We're in good shape here through the rest of this year a great deal of the program priced in and have confidence in our capital guidance that we have.
Got out there I think as we look out into next year, which I think is kind of what youre asking.
A number of the pricing agreements that we have in place today are rolling off so we would be subject to a higher market price for some of those goods and services. So we guided investors to think about as a maintenance level of capital for US is sitting here today, recognizing its early but its look.
Like it's 10% to 20% higher than current capital when you look out to 2023.
Your next question comes from Jeanine Wai with Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
We'd just like to follow up on your part.
Your comments about capital allocation and again, just revisiting what youre going to do with all this cash in particular, maybe on the mechanics on the debt side. So you took out the 2024 notes as planned and then you did about $60 million of open market repurchases.
What is your appetite on really trying to get after paying down the 2026.
Type maturity are you willing to make.
Premiums are you looking really to just do things more opportunistically in the market.
Yes, Thanks, Jeanine I appreciate the question.
I'll just turn it over to Corey there on how we're going to think about those absolute debt reductions.
Hey, Jeanine square here, obviously, the higher interest rates.
No takeouts much more attractive than they would've been.
Six to nine months ago.
We've even got debt that's trading below par once again, so for US you look at it one of the benefits of higher prices.
It means we've got excess free cash flow and we can take out some of the debt either at a discount or at a really short payout because if you look across.
Our debt stack, we've got a number of high coupon.
Notes that we'd like to start to manage down so we'll balance the the optionality on taken out the $26 with trying to be opportunistic in buyout different parts of the curve, which will help us.
Interest expense, but we can do that at a relatively low cost and probably don't need to go into may call like a lot of those are trading kind of in the 105 range even for the higher interest rate notes.
Janine if you watch what we did with the 24 is when we took those out we took them out I think both six months early so we didn't wait for the maturity there.
We balanced the sort of interest remaining in the.
The premium to take them out early and once that got into the right zone reacted. So I think thats, probably a good pattern for how we will think about it going forward.
Okay great.
Annuity there with the cash.
Maybe just moving on to operations and the guidance. The <unk> guide calls for an increase quarter over quarter and oil, but it looks like Ngls and that gas is going to be flat. So any color there on what's driving this and maybe any commentary on what the exit rate could be for the year. Thank you.
Yes, it's really just the well mix across the assets and when they are coming on stream. So are our third quarter turn in lines is our biggest quarter of the year by a decent margin. So.
As we March our way through the third quarter here, we'll see a number of wells coming on stream in the in the oily plays in and so that's really what's driving that that production shape and then you've got a fairly consistent profile in in the Montney of turn in lines. So so that's really what probably drives the NGL.
And gas shape the most so.
Really just a reflection of the timing and cadence of wells coming on stream.
Your next question comes from Doug Leggate with Bank of America. Please go ahead.
Thanks, Brendan I Wonder if I could pick up on your comments about inventory that you talked about more than 10 years of oil and more than 20 years of gas.
And I guess I've got two questions here My first one would be I.
I Wonder if you could just maybe frame your thoughts on the gas market.
Clearly, we've seen a reset in U S volatility, but I'd really love your perspective on the Canadian gas market.
You see counted.
Counted the LNG.
Move forward towards the middle of the decade, and then the related question is with the relative inventory depth that you have.
How do we think about the sustaining capital this always referred to oil as opposed to resetting the capital allocation towards drawing gas.
Yeah, Doug appreciate the question. Thanks, Thanks for that.
Really quick on gas macro views.
Increasingly constructive I think will be the way, we'd characterize our views here.
There is a ton of high quality gas resource in North America.
We've known that is a sector for a while clearly we have a big chunk of it in our portfolio. So we understand it very well.
But the piece that's really shifted here of course is strong global demand for gas and the increasing connectivity between North America and global markets.
And then also the <unk>.
Sort of layer on piece is just the huge challenge of building infrastructure to connect gas resource to markets in and we do see.
Our need for clear energy policy in both the U S and Canada to address the worlds.
The need for natural gas.
But we also see that that pathway is likely to be difficult, but at least in the near to medium term and so.
That kind of high demand with challenge connecting the resource to the market doesn't make us more constructive.
For benchmark prices, both globally and for Nymex.
And so.
That's great news for us because we think we've got this incredible gas option in the portfolio today.
And clearly that's something we're going to talk about more on the Montney webcast.
But you can also see in our actions one of the things that we think is critical as is making sure that you can get that gas to market and you can get it to market at an attractive price.
And that's why we've we've moved to ensure that we've got great market access for our Montney and great price diversification for our money.
With respect to your question on capital allocation I think the way to think about it is we've got great Optionality there.
As we start to design the 2023 capital program will be looking for how to maximize free cash flow and cash flow per share and returns and so that.
It is a lever that we can pull on.
If you look at our historical Montney and capital allocation.
Done over $400 million there in recent years. This year I think the midpoint of guidance is about 325, so there's clearly room for us to do a little bit more in the montney, if we choose to.
Okay.
I'm, sorry, Brendan just to be clear on the one seven to one point is it fair to assume that before considering inflationary effects.
That number is remains in place, but the swing within it.
Right.
Could go more towards Montney, perhaps.
That's right Doug in the.
The 107 to one eight is really keeping us flat on on both gas and oil its a fairly balanced.
Approach today so.
It would be.
Something we'd have to be have a great deal of conviction in to to really massively swing the the product mix around.
So I think our starting point would be if it was a maintenance level choice, our starting point would be just maintaining an across the board.
Okay. Thanks, guys.
Your next question comes from Neal Dingmann with Joyce. Please go ahead.
Good morning, Brian My questions on strategy is based on something you just said around drug pricing.
And you mentioned something on per share growth I guess my question is how do you view the best way to grow.
The business per share.
When you consider.
Production growth or obviously, the unique shareholder return plan that.
You all have laid out.
Yes.
I think that's I think your question is how we think about it Neil is really just laying those two alongside each other and looking at them on a risk basis.
Overtime.
Because this of course is not an instantaneous effect, we're looking to deliver its a sustained effect, we're looking to deliver so.
That's really how we're thinking about the right capital allocation.
As we head into 2023.
And just competing in comparing across those two choices.
Clearly, where our valuation is today it makes the buyback pretty attractive.
Yes, I would agree and then second question is likely for Greg Greg just on placing.
Placing guys now done a good job getting your hands around that.
Slide seven other similar in the past we have shown a lot of innovation and.
And different things you all are doing I'm just wondering.
A lot of folks have talked about I don't know you and Bryan are prepared to talk about what you might have.
Thinking about sort of inflation into 'twenty, three and beyond that again, if you arent thinking inflation might go up.
You have to do more contract rig.
Walk in pipe.
More on that now needed then.
Yeah.
Yes, I think I think Neil.
Really.
You might you might have missed it before but I did signal.
Our maintenance capital program sitting here, knowing what we know today recognizing it's August .
Our range that we've put on it is it's probably 10% to 20% up from from the 2022 guide number.
And really that just reflects a number of the pricing agreements that we have in place today rolling over and having to re price at market. So we don't know what that market will be we still got a few months to really kind of get that price discovery work done.
On your question around <unk>.
Locking in services on long lead items.
Particularly steel this is a place where we're already engaged in ensuring that we've got that.
Secured and to some extent priced.
Heading into next year and then we are at the very.
Early stages of locking in some rigs in spreads.
Through 2023.
But we will only ever see us do that on a portion of the program.
Never going to lock in the whole program because.
That flexibility is valuable because we do live in a volatile commodity industry.
Well thank you.
Yes. Thank you.
Your next question comes from Greg Pardy with RBC capital markets. Please go ahead.
Yes, thanks, thanks for the rundown.
Brendan you mentioned just the hedges rolling off earlier in the call is could you just maybe remind us of what your hedging strategy is and as the change is the pivot to kind of a function of a market call our balance sheet improvement or both.
Yes, Greg really appreciate the question actually because thats an important piece for us so.
Late last year, we did change our hedging policy.
And.
Pretty substantially so we move to what I kind of referred to as a pure risk management hedge approach.
Really it reflects the progress that we're making on the balance sheet.
And so if you look at our history over the last several years, we've been quite heavily hedged like three quarters of production hedged in.
And really as we saw the balance sheet, improving we saw the need to hedge go down materially and so today the way we are hedging as well.
We're hedging to manage the risk of a very low period of commodity prices and.
What we're doing is what drops out of that is we want to be able to protect the business against those low prices and still be free cash flow neutral or better after the base dividend.
And so what you're seeing US do is hedged about 20% to 25% of production we're.
We're doing it a quarter at a time.
Four quarters out so if you look at our disclosure today, you can see the first quarter 'twenty three in the second quarter 'twenty three books are done.
And we're partway through building the third quarter 'twenty three book today, and so the other aspect that I'll call attention to us.
We're using three way vehicles to make sure we can put a floor in that we're comfortable with and manages that risk of low prices, but also gives exposure to the upside.
And we're quite pleased with how we've been able to do that if you look at our our book today I think it reflects that approaching and gives us that upside exposure, while still providing that that downside protection in the event of a.
Unforeseen commodity price drop.
Okay got it thanks for that and I know, we've talked about cash taxes, but maybe Corey we've talked before you've mentioned before no material cash taxes for kind of five years has that overall picture changed with your spending and just given high prices.
Hey, Greg Yeah, a little bit I mean last time, I think we officially talked about it would've been in February and so obviously prices are dramatically higher today than they were at that point in time, but if you think about our business domestically in the U S. We exited last year with about $5 $3 billion in Nols.
And so even at today's prices, we think that cash tax horizon puts us kind of out into 2025, and I did give a little bit of that AMD color earlier, which could move that around by year in Canada, obviously, the strong gas prices have a bigger impact.
We highlighted that in our mind, a teaser there with $2 billion of free cash flow and the asset we exited last year with about 800 of Nols there.
So if you think about the cash.
Cash tax in the Canadian business, that's probably come forward as we could have.
Minimal to $100 million next year in that business if prices stay really high. So if you think about kind of a cut off there.
Think about it like $5 as your trigger point to where you might have some cash tax in the Canadian business next year, but it's really more in the order of magnitude of small hundreds of millions as opposed to <unk>.
Cash taxable for the whole enterprise.
Your next question comes from Gabe Daoud with Cowen. Please go ahead.
Thanks, Good morning, everybody.
Brian just curious if you can maybe give us an update on thoughts around M&A and continuing to do some bolt ons I believe the previous.
You cited was a couple hundred million Bucks for bolt ons taken out of free cash flow is that is that how we should still think about it.
Yes, Hey, Gabe, yes, no change to our strategy here.
The bolt on approach is working really well for us.
Since we launched that last September we have added over 140 net locations to our premium inventory inorganically for around $30 million. So the math on that is fantastically accretive.
And we continue to see that to be a good complement to the organic portfolio renewal that we're also undertaking that added about 500 locations.
Over that period so.
We really like that I think with regards to sort of large M&A. We just continue to see that.
Doesn't compete with our other capital allocation options, especially the the value we see in our own equity so.
No change to our to our strategy on the M&A front.
Great. Thanks, Brendan Super clear maybe.
Maybe just a follow up could you give us an update around permits in the Montney is there anything to highlight there. Thank you guys.
Thanks Gabe.
So on the Montney side on the Blueberry River first nation permits issued we remain encouraged there.
The province in the Treaty eight first nations.
Have got an encouraging high level framework deal.
In place and we see the province.
Starting to work through the permitting backlog so.
As you sit here today, we've got all the permits for our 2022 program and were over a third permitted on 2023, so watching it closely.
Clearly is going to be something we're going to want to see.
In place.
As we get through the rest of this year.
Before we land on a definitive capital allocation there.
This is the great part of the multi basin strategy is that we've got the ability to rotate that capital into either the Alberta side of the montney or into other parts of the portfolio and generate the same.
Corporate returns so regardless of the outcome. We are in good shape here, but it is encouraging to see some progress there.
Your next question comes from Menno <unk> with TD Securities. Please go ahead.
Good morning, everyone I think I'll start with the pain Center data that you talked about earlier that references roughly 2800 feet per day.
Drill again give or take 5500 feet per day for pacesetter completions.
Obviously big numbers. So maybe you can comment on where you think we stand in the <unk>.
Innovation cycle, and whether youre seeing those improvement curve starting to flatten out on.
On a related note what is your inflation estimate net of efficiency gains or is that already captured in the 10% to 20% that you've talked about.
Yes, great Great question.
The.
Innovation innings game has been one we've talked with the market about for a number of years now.
I think whats always.
As shown up as the right. The smart that was always to bet on the innovation and embed on further efficiency gains and we believe that deeply here in.
Greg said, it's really kind of a cultural piece for us that there is always another.
Layer to unwrap and drive costs down and so.
We're excited about those pacesetters because they represent big step changes from the averages.
Of where we've been and so it just tells US there is more to play for.
<unk>.
We've talked about this before but.
What we've seen time and again is once we are able to do it on a pace setter. Then the question is just all about repeat ability so.
That's kind of the approach we take to to work our way through this in turn Pacesetters in quarterly averages over time so.
The second part of your question is really around.
As the.
Efficiency gain baked into that $10 million to $20 million and it is thats why the range is so large sitting here today.
Because we were going to continue to learn through the back half of the year on how.
How much of those pacesetters, we can convert into repeatable averages, but we're also going to learn more about where the market sits on pricing.
<unk>.
Trying to take that into account, but but lots of uncertainty on both sides of that calculation right now.
Yes. Thanks, Brendan that's that's helpful. Maybe I'll follow up with a question on electrification of your operation.
Our reference to it in your <unk>.
The inability reports.
Much of a priority as Bob where do you stand in that process and maybe you can just remind us.
More nuanced operational benefits going electric outside of the obvious stuff like de carbonization.
Yes.
Electrification is a piece of our emissions reduction plan.
Have a target to reduce DHT intensity by 50%.
We're sitting here about halfway through that target.
On our on our actuals that we released last quarter in our sustainability report so great progress.
On that end.
Some of that electrification is in our ongoing production operations.
We were able to take emissions out of <unk>.
Places like compression and so forth and then the other place that it is in is in our drilling and completions.
<unk> now.
The D&C emissions.
Or a smaller piece of the overall emissions pie for us and so.
Were really driven by the returns and the ability to displace higher cost diesel, particularly in today's environment.
With either natural gas or electricity direct direct from the from the power lines. So.
That's the primary driver and then of course, we look for a secondary gain on the emissions reduction to complement that but it's really the the returns that are driving us there.
Your next question comes from Jeff J with Daniel Energy Partners. Please go ahead.
Hey, guys.
Congratulations on being aware of not having any capex increases for the quarter I'm just kind of curious in terms of to kind of follow up on neal's question earlier.
Locked and thank you all for your kind of 80%, 90% or is there some wiggle room, and then I guess secondarily when it was there any capital associated with divested all subs and the altogether or not thanks.
Yes, Jeff I appreciate the questions I'll take the second one first so essentially zero capital in those divested assets.
The UN.
<unk> and Bakken assets that we sold.
Really we're not attracting capital they were they were high cost mature assets that didn't have.
Inventory associated with them.
By the way that they had almost de minimis cash flow associated with them as well because of that high cost structure.
So it was an excellent time in the market to to divest them for the proceeds that we did.
And then.
The the question on how locked in we are.
Fairly locked in we did do that earlier this year, where we saw the opportunity to add locked in prices for things like steel.
And we were already fairly locked in on the D&C services. So it's a pretty high percentage for us.
Excellent that's helpful. Thanks, a lot.
Yes, you bet.
Thank you.
At this time, we have completed the question and answer session and we'll turn the call back to Mr. Jorge.
Thank you operator, and thank you everyone for joining us on the call today.
Interest in our call is now complete.
Sure.
Ladies and gentlemen that concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.
Okay.