OVV: Maintenance Capital Program Driving Quality Over Quantity for 2024 & Into 2025

Ovintiv (OVV) 2Q24 Financial/Production Results, Analysis & Outlook

Key Takeaways

• Strong 2Q24 production results exceeding guidance drove positive financial and profitability metrics.

• Forecasting a steady D&C program with $1.1B in forecasted Capex for the remainder of the year equating to a levelling of production through to year-end.

• Early estimates for 2025 suggests a mirroring of the 2024 maintenance capital program with an emphasis on operational efficiencies and well productivity. 2025 Capex program estimated at ~$3.3B on 240 TILs.

2Q24 Forecast vs Actuals

Quarterly variance between OVV’s quarterly results and my estimates is largely driven by the production increase beyond the E&Ps quarterly guidance. Quarterly production results were 4% higher than my estimate, which in turn cascaded to Revenue, Net Income, Earnings per Share and Free Cash Flow (FCF). My Capex estimates were also underweight due to not accounting for OVV’s growing emphasis on utilizing trimulfrac services as well as the surge in Montney-based TILs for the quarter. FCF variance was due to the combination of underweight Capex (-$42MM), coupled with underweight Cash Flow from Operations prior to Working Capital ($173MM).

D&C Activity and Capital Spend Outlook

The second half of 2025 is expected to see sequentially flat capital spend of ~$550MM each quarter, which correspondingly equates to steady TILs in the Permian (64) and Montney (23). For 2H24, I am estimating an equal balance of TILs in the Permian (64) and Montney (23), while Uinta finishes its D&C program in 3Q with 13 TILs, and Anadarko begins its D&C program with 10 wells drilled and completed through the remainder of the year.

Next year’s capital program will not be finalized until December, though the 2025 Capex program is expected to repeat the capital-efficient approach of 2024, with a likely step-down from six to five rigs in the Permian Basin, a 3-4 rig program in the Montney and 1-off rigs for the drilling programs in Anadarko and Uinta though I have estimated an increase in Anadarko TILs to ensure average production stays on par with 2024. Efficiency gains are becoming more standardized and expectations are for trimulfracs to be used for the majority of its Permian completions next year. As a result, OVV’s FY25 estimated Capex program is targeting ~$2.3B on 240 TILs.

Operating and Production Outlook

Based on OVV’s production guidance and executive comments during the Analyst Q&A session, OVV’s production will flatten through the second half of 2024 via a consistent quarter-to-quarter D&C program. Full-year production targets remain at the ~210Mbopd for oil and condensate while total production is on pace to average ~580Mboepd. Looking ahead to 2025, given the maintenance capital philosophy highlighted during the 2Q24 call, OVV is anticipated to keep production flat through 2025, likely keeping these same oil/condensate and total production targets. Operational optimization and well productivity initiatives are likely to be the focal points through next year. In turn, that equates to a step-down in rigs required (and as noted in the Permian rig count dropping from 6 to 5 for 2H25), and cycle time improvements through OVV’s trimulfrac utilization.

Marketing/Hedging

OVV is managing its exposure to lower natural gas commodity prices with a hedge program covering 20-25% of volumes using three-way structures. OVV expects to continue marketing its gas through a diversified reference price approach The natural gas price erosion experienced through 2Q24 is likely to continue through the remainder of 3Q and early 4Q with OVV intent on maximizing price realizations through diversified pricing references beyond AECO. While the company noted the benefits of the operational TMX pipeline and the impending operational start for LNG Canada, he does not see a re-rating in AECO pricing relative to Henry Hub due to the abundance of natural gas production through Western Canada.

Inventory, Reserves and M&A Potential

The 2Q24 Earnings Q&A period touched on potential acquisition targets with one analyst noting rumors that OVV could potentially be in the running to acquire Double Eagle Energy Holdings IV’s ( private) Permian assets. While OVV acknowledged that they actively review potential acquisitions as they come available, the executive team emphasized “quality over quantity” when it comes to future acquisitions. The executive team likes its diversified mix of assets across four basins noting the rate of return competitiveness of its wells in Uinta and Anadarko.

That said, my reserve life calculations (based on 2024’s TIL program) for all of OVV’s US-based assets are well below the 10-year benchmark. Though the company touts a corporate-level 10-15 year inventory, the weighting of that inventory appears to be in the Montney where my calculations suggest a 30+ year inventory of top tier, natural gas and condensate-weighted well locations. In turn, it would be reasonable to believe that OVV may pursue another material acquisition in the US, especially considering the company’s debt to adjusted EBITDA ratio is currently at 1.2x and fast approaching its debt leverage target of 1.0x.

Companies Mentioned

• Ovintiv ULC (OVV)

• Double Eagle Energy Holdings IV (private)

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