Mark Ovintiv Inc. as yet another North American producer expecting to pull back the reins on natural gas development this year. 

The Denver-based explorer is reducing development “in response to weaker short term North American natural gas fundamentals,” CEO Brendan McCracken said during the recent quarterly conference call. 

Executives of other U.S.-based producers during 4Q2022 calls said they too would cut back gas output in favor of oil and liquids. Ovintiv is joining them.

The Permian Basin’s oil and liquids are to be Ovintiv’s No. 1 target in 2023, the CEO said. Ovintiv is planning to keep overall output flat. It has substantial assets in the Anadarko and Denver-Julesburg basins, as well as the Bakken and Montney shales.

“Our ability to shift capital to maximize corporate returns is a competitive advantage,” McCracken said. “We did this in 2022 in response to the Montney permitting slowdown, which is now behind us.” 

However, Ovintiv is “making use of this option again in 2023” because of weak gas prices.

“In our business, access to premium resource is another essential component to generating durable returns,” McCracken told analysts. “We are continuously evaluating opportunities to extend our runway through both organic appraisal and assessment efforts, as well as through bolt-ons.”

Bolting On

Last year, “through organic appraisal and more than 90 transactions, we cost effectively added approximately 450 inventory locations,” the CEO said. The most additions were in the Permian, “where we added about 8,000 net acres to our core positions in Midland, Martin, Upton and Howard” counties in West Texas.

“The next biggest additions were condensate in oil locations,” McCracken said. “All told, we replaced two times the number of wells we drilled last year. We’re committed to staying disciplined and opportunistic in our bolt-on efforts – and only transacting when we can generate strong full-cycle returns at mid-cycle pricing.”

Average production in 2022 was 510,000 boe/d, including 176,000 b/d oil/condensate, 86,000 b/d natural gas liquids (NGL) and 1.494 Bcf/d natural gas. During 4Q2022, output averaged 524,000 boe/d, with 175,000 b/d oil/condensate, 89,000 b/d NGLs and 1.561 Bcf/d natural gas.

“We are leveraging our multi-basin, multi-product portfolio and focusing 100% of our investment in oil- and condensate-rich areas,” CFO Corey Code said. “But as always, we have the optionality to shift capital to other parts of our portfolio.”

If economic conditions improve, Ovintiv plans to “participate in commodity price upside, up to $110/bbl for oil and $8.00/MMBtu for natural gas,” Code said.

The company is planning an overall 10-rig program this year, with output “split evenly between liquids and natural gas,” COO Greg Givens told analysts. Ovintiv “intentionally built a drilled but uncompleted or DUC well inventory in the fourth quarter. We are limiting our usage of spot crews and taking a methodical approach to bringing these wells online through the first half of 2023.”

This year the company also expects to see “less variation in turn in line cadence” as wells go online,” Givens said. That should set up Ovintiv “for a more radical production profile in the second half of the year and going forward.”

There was “quite a bit of inflation” through 2022, the COO noted. Since the start of the year, though, “it feels like the rate of change has really subsided, and we’re seeing a leveling off. As far as how that affects us across our different plays, we are seeing less inflation in Canada as compared to the U.S.”

LNG Beckons – Eventually

Meanwhile, the company is keeping an eye on Western Canada LNG projects, which could impact development in the Montney. The Shell plc-led LNG Canada facility is progressing toward a “mid-decade start up,” McCracken noted. “That’s an additional 2.1 Bcf/d of takeaway.” 

In addition, “there’s the potential” for more liquefied natural gas projects to be sanctioned in the latter half of the decade. So, we’re watching that closely…

“We do think the next logical step of a price diversification would be to get some LNG exposure in the portfolio. So that’s something we continue to evaluate.” There is “nothing particularly imminent on that, but it is definitely something we continue to monitor and look at actively…

“When those LNG projects…begin to turn on in Canada, it will help enhance the structural fundamentals of the AECO market.”

During 4Q2022, Permian production averaged 122,000 boe/d; 16 net wells were turned to sales. Permian capex this year is estimated at $850-950 million, with three rigs on average running. Around 70-80 wells are forecast to be turned to sales.

In the Montney, natural-gas weighted production averaged 216,000 boe/d in 4Q2022, with 11 net wells turned inline. The company plans to spend $500-600 million in the basin this year, run up to four rigs and bring online 70-80 net wells.

Uinta production averaged 20,000 boe/d in the final three months of 2022, with three net wells going online. The Bakken’s average production was 32,000 boe/d, with six net wells going online. The Uinta and Bakken units are earmarked for $500-600 million combined capital this year, with 40-50 net wells set to be turned to sales.

Anadarko production averaged 128,000 boe/d in 4Q2022, with eight net wells turned to sales. This year, $200-300 million is budgeted, and 25-30 net wells should be turned online.

Natural gas production in 4Q2022 fell year/year to 1.56 Bcf/d from 1.48 Bcf/d. In 2022, gas output averaged 1.49 Bcf/d, down from 1.56 Bcf/d in 2021. Natural gas comprises 49% of Ovintiv’s production, with combined oil and natural gas liquids at 51%.

The realized natural gas price in 4Q2022 declined year/year to $2.49/Mcf from $2.84. The realized gas price in 2022 averaged $5.89 versus $3.58 in 2021.

Net earnings in the fourth quarter totaled $1.34 billion ($5.30/share), nearly flat from $1.38 billion ($5.33) in 4Q2021. In 2022, net profits climbed to $3.6 billion ($14.02/share) compared with $1.4 billion ($5.44) in 2021.