Ovintiv Inc. is increasing its production and extending the life of its wells at a lower cost, largely based on its embrace of cube development across its portfolio in the U.S. and Canada.
“The result is a 10% increase in our expected full-year free cash flow, which means more buybacks and faster deleveraging,” CEO Brenden McCracken said during a second-quarter report to investors on July 25.
“In our industry, there are three requirements to deliver superior durable returns. First, you need inventory depth in the best parts of the best basins. Second, you need the culture and the expertise, and increasingly, the private data to convert that inventory to free cash flow. And third, you need capital discipline to make sure you’re not leaking away returns by allocating capital to underperforming uses,” McCracken said.
Ovintiv has high-graded its assets in the Permian and the Montney, which are complemented by a low-decline, high free-cash-flow generating asset in the Anadarko Basin, he said.
“Our work to build inventory over the past several years means we have nearly 15 years of premium inventory in the Permian, close to 20 years of premium oil inventory in the Montney and over a decade in the Anadarko,” he said, adding that it all adds up to a post-dividend breakeven price below $40 WTI.
Ovintiv has increased its guidance for full-year free cash flow to $1.65 billion, a 10% improvement from the first quarter.
Ovintiv’s performance for the April-June period shows that the firm’s industrial model is not only holding but strengthening, said Evercore analyst Chris Baker.
“The company is now squarely on offense, raising full-year oil [plus] condensate volume guidance while simultaneously cutting capital. That combination, more barrels for fewer dollars, is hard to ignore in this tape and speaks directly to what makes OVV different,” Baker said in a research note.
The cube
Ovintiv pioneered cube development nearly a decade ago to efficiently develop its inventory and deliver long-term repeatable results. McCracken said the benefits of this approach are showing up in the well results, “specifically in the Permian, where oil type curves that have improved 10% over the last three years, while most of our peers are facing productivity degradation.”
Ovintiv is in an advantaged position when it comes to inventory quality and depth.
“We didn’t get here by accident. We’ve deliberately taken a different development approach than most of our industry peers,” he said. “The result is a 10% improvement in our Permian oil productivity per foot over the last few years, while the broader basin is fighting a 2% annual decline.”
Ovintiv has focused on extending inventory depth and quality and maximizing resource recovery during the last decade to preserve the quality and longevity of inventory across the portfolio.
Ovintiv was among the earliest players to dig into an understanding of how wells interact with each other “as a 4D system,” McCracken said. The firm takes a systematic approach to resource development, co-developing multiple stack zones from a single well pad. The strategy creates value by maximizing both returns and resource recovery.
“The temptation in developing multi-zone acreage is to cherry pick the highest productivity wells first, then come back and drill infill wells on the rest of the acreage later. The benefit is higher initial production rates from the first batch of wells, but it comes at the expense of sterilizing large swaths of acreage because when you come back to drill the infill wells, the reservoir pressure is depleted, and the well performance of the child wells is often 30% to 40% worse than the parents,” he said. “We developed the entire stack at once.”
The approach samples wells from across the asset, not just the highest return wells. Ovintiv has also determined the optimal timing to drill an adjacent cube at roughly 18 to 24 months after drilling the first to minimize well communication and depletion.
“The outcome is consistent and repeatable results year after year because we have not burned through our highest return inventory, and we have maximized the [net present value] of every acre,” McCracken said. “Nowhere is this more evident than in the Permian. Across our acreage footprint, our well productivity continues to be strong and consistent. This supports durable return generation across our 12 to 15 years of premium inventory in the play.”
The company continues to push the envelope in other ways. Year-to-date, drilling speed averaged over 2,100 ft/day, which is about 35% faster than the rate in 2022. Completion speed has averaged more than 3,900 ft/day, about 50% faster than in 2022.
“The combination of faster cycle times with consistently strong well performance results in industry-leading capital efficiency and highly competitive returns,” he said.