Ovintiv Inc., whose portfolio stretches from Western Canada to West Texas, is seeing costs for materials and labor rising, but inflationary pressures and capital guidance are being kept in check with operational efficiencies, executives said Wednesday.
CEO Doug Suttles, who is retiring, presided over his final conference call on Wednesday, ushering in a new era with President Brendan McCracken at the helm. During the call to discuss quarterly results, the executive team shared how best practices are being put to work across North America’s onshore.
“We have seen inflationary attention on certain items, but we are more than offsetting these pressures with operational efficiencies, leaving our original full year capital guidance untouched,” CFO Corey Code said.
Ovintiv has “substantial exposure to multiple revenue streams” with its holdings concentrated in the Bakken and Montney shales, as well as the Anadarko and Permian basins. It also has acreage in the Deep Panuke formation in Canada, as well as in the Uinta Basin.
Average total production was 555,000 boe/d in 2Q2021, with crude and condensate output averaging 201,000 b/d. Realized prices averaged $34.20/boe. Oil and condensate prices, excluding hedges, averaged $63.47/bbl, with natural gas at $2.75/Mcf.
“We achieved 201,000 b/d of crude and condensate, despite closing on our Eagle Ford and Duvernay asset sales in the quarter,” Code said. In 2Q2020, crude and condensate output was about 198,000 b/d.
In addition, natural gas production climbed to more than 1.6 Bcf/d up from 1.55 Bcf/d in 2Q2020. Natural gas liquids output rose to 86,000 b/d from 80,000 b/d.
“Our multi-basin and multi-product production profile generates cash flow from multiple sources and provides us with robust market optionality,” Code said.
More Efficiencies, Less Costs
Gaining efficiencies is helping to alleviate capital expenditure (capex) cost pressures, COO Greg Givens noted.
“Driven by the global economic recovery and rise in commodity prices, we’re seeing an increase in demand for raw materials, leading to higher diesel and steel costs. Also, like most other industries, we are starting to see the impact global inflation is having on the labor market.
“That being said, our teams are operating more efficiently than ever before. Our ability to continue setting the bar higher operationally is more than offsetting today’s inflationary pressure. In addition, through strategic contract structuring, local sourcing and improved logistics, we have lowered the cost of sand and water.”
Steel is a “major input component to our facilities,” and capex costs are rising in other areas, he said. “And so we’re reusing a lot of our testing equipment, tying in new wells to existing facilities. That allows us to actually reduce our facilities costs and avoid some of that inflationary pressure. We’re also working really hard as we always have on reducing cycle times.
“As you know, days in this business are dollars, and so the faster we can drill and complete our wells, the fewer days we have on location…”
Ovintiv drilled six of its “fastest wells to date” during 2Q2021 in the Montney, Givens said. Teams also used what is known in the business as “simul-fracs” to complete its entire drilling program in the Anadarko’s STACK, aka the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties.
Traditional zipper fracturing (fracking) on a four-well pad allows two wells to be stimulated while two wells sit idle. Simul-fracs, as defined by completions expert Halliburton Co., eliminate the idle time by simultaneously completing all four wells.
“We’re accomplishing new milestones across our portfolio and across all operational disciplines,” Givens said. Ovintiv’s “pacesetter” wells have fostered “innovation and cross-functional learning. In fact, many of today’s average cost, drill times and completion efficiency metrics were pacesetter performances less than a year ago.”
Compared to two years ago, the Permian unit has made “significant strides in every aspect of our operations,” Givens said. “Driven by wellbore design optimization, new bottomhole assembly technology and a laser focus on flat or idle time reduction, our second quarter rig released wells in the Permian averaged over 12,000 feet of lateral length and nearly 2,000 feet of drilling per day. This is over 30% longer and 15% faster in 2019.” The Permian team overall has reduced facilities costs by $180,000/well since 2019, Givens added.
Likewise in the Bakken, drilling and completion costs have been slashed by 14% since 2019. Three Bakken wells brought online during 2Q2021 averaged 1,235 b/d oil through the first 60 days of production, Givens said.
“We are currently projecting these wells to pay out in less than six months. When we combine our high quality acreage position, the basin’s oil leverage and today’s pricing environment, we’re delivering portfolio leading returns in our Bakken program. This asset will generate substantial free cash flow for us in 2021, and we plan on continuing to operate a rig in the basin for the remainder of the year.”
Accelerating Debt Reduction
Debt reduction, however, remains the top priority. Using free cash flow and asset sale proceeds, Ovintiv has accelerated its $4.5 billion net debt target timeline to the end of 2021. A new target to reduce debt by another $3 billion is set for the end of 2023, assuming $50 oil and $2.75 natural gas.
Ovintiv is also giving back to shareholders, with quarterly dividend payments increased by half to 14 cents/share.
Ovintiv on Wednesday also published its 2020 environmental, social and governance metrics. Greenhouse gas emissions intensity fell from 2019 by 14% with methane emissions intensity down by 33%. Flaring/venting intensity declined by 36%. In addition, Ovintiv said it recorded a 10% reduction in total recordable injury frequency from 2019, as well as an 11% decline in spill intensity performance.
Net losses were $205 million (minus 79 cents/share) in 2Q2021, including a hedging loss of $799 million. In 2Q2020, net losses totaled nearly $4.09 billion (minus $16.87/share).
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