Ovintiv Inc.’s multi-basin portfolio across North America primarily is focused on crude and condensate, but with around 1.5 Bcf/d of natural gas output, there are lots of options available depending on the direction of commodity prices, CEO Doug Suttles said last week.

drilling and completion costs

Speaking with his management team during a third quarter conference call, Suttles said there are scenarios where Ovintiv could move some capital from North American crude plays to gassier leaseholds, particularly the Montney Shale, which straddles British Columbia and Alberta. 

“A small move in gas prices makes a big difference in revenues and cash flow,” he said. “In fact, a 25-cent increase in gas prices is about $100 million of incremental cash flow.”

In the Montney, Ovintiv has “everything from very high liquid-yield condensate wells to dry gas that are very highly productive. So we have that optionality. For us to do that, it would take more than just strength and the short-term strip. It takes a more fundamental view of it. But as I mentioned, we still get the benefit of that 1.5 Bcf/d in that exposure. 

“I don’t think we’ve yet seen enough movement beyond 2021 to really justify moving a lot of capital” into the gas leaseholds. “And we do have some concern about, in particular, what the private actors are going to do here with the movement in the strip and how they might throw capital in, which could create longer-term risk on gas prices…

“Today, we’re not pulling on it, but we continue to monitor it. If we continue to see demand growth and exports grow, and strength in the longer portion of the curve, we could always go there.”

‘New’ E&P Model

The Denver-based independent has shifted to a “new” exploration and production (E&P) model, with a focus on free cash flow and less debt, formerly not the primary model used by the industry. The important thing is to maintain scale, Suttles told investors. 

The consolidation underway across the E&P sector validates that strategy, he said.

“Ultimately, to be successful in a commodity that is going to see low growth globally, and volatility is going to be a feature, a few things are going to matter. The companies have to have scale,” he said. “We believe that’s somewhere around 500,000 boe/d. Maybe that number changes, but many of the transactions you have seen have been trying to get to that scale because many of those companies were much smaller than that.”

Consolidation improves “organizational efficiency, cost structures, ability to apply innovation,” he said. We thought multi-basin was always a key. It’s a part of risk management. We’re also demonstrating the value of being able to move ideas around in real time.”
In every basin in which Ovintiv operates, it continues to be a low-cost leader, the CEO noted. “That’s not by accident. I think…this risk management approach is key. We’ve all seen that in spades more recently, and that’s everything from things like how you think about protecting your balance sheet and cash flows with hedging programs to how you actually do transportation and processing of your products.

“Many people recently have been caught by that and those uncertainties, and this model works. We think we’re there. We think we’re where we need to be. And we’re very clear that the best way to create shareholder value for our shareholders is to continue to execute incredibly well and actually reduce our debt, and that’s where our focus is today. “

Full-year investments are expected to be $900 million below the initial budget. Completions activities have resumed, and the company is working its way through about 100 drilled but uncompleted wells, or DUCs, built up through June. Ovintiv expects to end 2020 with around 30 DUCs, a more normal level, Suttles said.

Lowering Costs

Costs also continue to decline. Through September costs averaged $11.77/boe, down 7% year/year. Third quarter capital investments were $351 million. Ovintiv reiterated previous guidance for the full year of $1.8 billion, down by $900 million from guidance issued early this year.

Full-year cost reductions of more than $200 million “are expected to be durable into 2021 and an additional $100 million of legacy cost reductions will further enhance cash flows,” Suttles said.

When compared to 2Q2020, Permian Basin well costs are down by $400,000, COO Greg Givens told investors. 

“Costs were about $500/foot or 9% lower. Our pacesetter wells came in at $430/foot. This was one of our best quarters ever, and the good news was distributed across Howard, Midland and Martin counties” of West Texas, Givens noted. 

Costs also declined by about $200,000 in the Montney. And in the Anadarko Basin, costs were more than 40% lower than at the time Ovintiv, then Encana Corp., took over Newfield Exploration Co., Givens said. Newfield was an Anadarko-focused explorer. Well costs that were $7.9 million about two years ago are now $4.6 million. 

Ovintiv’s total production averaged 510,000 boe/d in 3Q2020. Crude and condensate output averaged 186,000 b/d, versus previous guidance of 180,000. 

Permian production averaged 106,000 boe/d with three rigs in operation. Twenty-five net wells were drilled and 16 wells were turned in line (TIL). 

Output from the Anadarko averaged 138,000 boe/d using two rigs. Ten net wells were drilled and there were five net wells TIL. 

In the Montney, output averaged 187,000 boe/d. Ovintiv averaged two rigs, and it drilled 11 net wells and had 14 net wells TIL. On average, the Canadian wells were completed in two days, or half the time it took in 2018.

Ovintiv also has base assets in the Eagle Ford and Bakken shales, as well as the Uinta and Duvernay formations. Six net wells turned to sales in 3Q2020 from these base assets, all in the Eagle Ford.

Average realized prices including hedges in 3Q2020 were $41.39/bbl for oil, $20.81/bbl for natural gas liquids (NGL) and $2.15/Mcf for natural gas, resulting in a total price of $22.66/boe. Excluding hedges, Ovintiv fetched on average $39.40 for oil, $19.45 for NGLs and $1.81 for natural gas, or a total average of $20.81/boe.

“The year 2020 will be the third consecutive year that we have generated free cash flow and we have returned $1.7 billion of cash to shareholders since 2018,” Suttles said. “A long-term reinvestment rate of not greater than 75% provides significant cash for return to shareholders with a near-term focus on debt reduction. Importantly, we can do this while maintaining our ‘scale’ at about 200,000 b/d of crude and condensate, and with significant natural gas and NGL production.”

As of Oct. 16, 4Q2020 hedges include 180,000 b/d oil at an average price of $51.76 and about 1.2 Bcf/d gas at $2.66.

In October, operations ramped up at Keyera’s Pipestone Processing Facility in the Montney, more than five months ahead of schedule and on budget. The startup gave Ovintiv another 170 MMcf/d gas and 19,000 b/d liquids capacity. No new drilling was necessary to satisfy the new capacity arrangements.

Net losses totaled $1.5 billion (minus $5.85/share) in 3Q2020, versus year-ago profits of $149 million (56 cents). Included in the 3Q2020 results was a one-time impairment of $1.34 billion, primarily related to the decline in the value of proved oil and gas reserves from a year ago. Ovintiv also recorded a one-time loss of $243 million regarding derivative positions.