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Ovintiv Pursuing Natural Gas Price ‘Diversification,’ Citing Strong Market Fundamentals

Ovintiv Inc. is exploring options to increase the exposure of its multi-basin upstream portfolio to a dynamic global natural gas market, CEO Brendan McCracken said. 

The Denver-based independent works in numerous onshore plays throughout North America, including in the Montney Shale, Anadarko Basin, Permian Basin, Bakken Shale and Uinta Basin.

On a call to discuss first-quarter earnings, McCracken highlighted Ovintiv’s “huge inventory of high-return gas,” and said the management team is “quite encouraged by the long-term gas fundamentals.”

He cited Ovintiv’s strategy of natural gas price diversification, explaining that about 80% of the firm’s Permian production is priced outside of the Waha hub and about 50% of its Canadian output is priced outside the NOVA/AECO hub. 

He added that as part of this strategy, Ovintiv is “considering options for getting that pricing exposure” to the white-hot global liquefied natural gas (LNG) market. Global LNG benchmarks, namely Europe’s Title Transfer Facility and Asia’s Japan Korea Marker, have traded at a substantial premium to the U.S. benchmark Henry Hub amid fierce competition for molecules.

Ovintiv is not pursuing equity interests in LNG projects, McCracken said, but it is “certainly looking at some of the evolving commercial opportunities…that could be on the West Coast of Canada or off the U.S. Gulf Coast or a combination of both, and so that is something we’re actively looking at today.”

Equipment, Crews in Short Supply

Ovintiv has upwardly revised its 2022 capital spending budget in order to keep the best rigs and personnel across its multi-basin portfolio, according to its executives.

Producers and oilfield services firms alike have cited a shortage of top-notch “super-spec” drilling rigs and qualified hydraulic fracturing crews this year amid a tight global oil market.

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Ovintiv’s management team highlighted efficiency gains achieved by drilling longer lateral footage per well, and by increased usage of the simultaneous fracturing, aka simul-frac, completions technique.

COO Greg Givens said “we are adding a modest amount of capital to this year’s plan exclusively dedicated to keeping our high spec equipment and simul-frac spreads running through the end of the year and into 2023. Operating faster and more efficiently has never been more important. 

“Therefore, in order…to maintain our industry-leading operational edge, we are taking a proactive approach to retain the high quality equipment and crews necessary to generate our leading efficiencies.” 

McCracken said Ovintiv will not seek to increase production this year, notwithstanding the bullish outlook for oil and natural gas pricing.

“Despite the significant inflationary pressures impacting our industry, we continue to deliver top tier capital efficiency and generate superior returns,” McCracken said. “We are maintaining discipline in a volatile market and will not invest in growth in 2022.”

The CEO noted that, “Towards the end of Q1 and into Q2, we’ve seen inflation step up past our original expectations. This incremental inflation has been largely driven by higher commodity prices, global geopolitical events, and supply chain disruptions.”

Multi-Basin Approach

Ovintiv produced about 500,000 boe/d in the first quarter, including 173,000 b/d oil, 79,000 b/d natural gas liquids (NGL) and 1.49 Bcf/d natural gas. 

“Production in the quarter was impacted by higher Canadian royalty rates, operational delays and weather disruptions,” management said. McCracken noted that royalty rates in Canada are directly linked to commodity prices, which have soared this year. 

The company produced 114,000 boe/d (79% liquids) in the Permian, 120,000 boe/d (61% liquids) in the Anadarko and 213,000 boe/d in the Montney (23% liquids). 

Ovintiv turned 18 net wells to sales each in the Permian and Anadarko, and 19 in the Montney.

First quarter wells turned to sales in the Permian averaged a lateral length of over 14,300 feet, or 30% longer than the 2021 program average, management said. 

In the Anadarko, Ovintiv completed four wells with an average lateral length greater than 15,000 feet.

Average realized prices including hedging losses were $82.08/bbl for oil and condensate, $34.94/bbl for NGLs and $2.60/Mcf for natural gas.

Why is Ovintiv Raising Capex?

Ovintiv has upped its full-year 2022 capital investment forecast to a range of $1.7-1.8 billion from previous guidance of $1.5 billion. 

“The increase in capital is primarily due to incremental inflationary cost pressures given the higher commodity price environment,” management said. 

The upward revision also reflects “costs associated with maintaining high spec equipment and preferred crews through year-end,” the firm said. 

Ovintiv plans to spend $650-700 million in the Permian, $350-400 million in the Anadarko, $300-350 million in the Montney and $200-250 million in the Bakken during 2022. 

“Planned activity levels for the remainder of the year are largely unchanged compared to the original guidance,” management said, adding, “Capital investment is expected to be 55 to 60% weighted to the first half of the year.”

Ovintiv said it expects to deliver full-year production volumes of 180,000-185,000 b/d oil and condensate, 78,000-82,000 b/d NGLs and 1.45-1.5 Bcf/d natural gas.

Alongside its 1Q2022 earnings, Ovintiv published its 2022 sustainability report, which highlighted reductions in greenhouse gas (GHG) emissions and natural gas flaring in 2021.

Ovintiv said it reduced its Scope 1 and 2 greenhouse gas emissions intensity by 24% in 2021 from 2019 levels. 

The company hit its target of reducing methane emission intensity by 33% from 2019 levels four years ahead of schedule, and reduced flaring and venting intensity to 0.4% of gross produced gas in 2021 versus 0.7% in 2020.

Ovintiv reported a net loss of $241 million (minus 94 cents/share) for the first quarter, versus a profit of $309 million ($1.19) in 1Q2021. The result included pre-tax hedging losses of $448 million.

Read More: Ovintiv Pursuing Natural Gas Price ‘Diversification,’ Citing Strong Market Fundamentals

2022-05-15 23:37:24

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