Ovintiv Inc. (NYSE:OVV) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Company Representatives
Brendan McCracken – Chief Executive Officer
Greg Givens – Executive Vice President, Chief Operating Officer
Corey Code – Executive Vice President, Chief Financial Officer
Jason Verhaest – Investor Relations
Conference Call Participants
Arun Jayaram – JPMorgan
Neil Mehta – Goldman Sachs
Jeanine Wai – Barclays
Doug Leggate – Bank of America
Neal Dingmann – Truist
Greg Pardy – RBC Capital Markets
Gabe Daoud – Cowen
Menno Hulshof – TD Securities
Geoff Jay – Daniel Energy Partners
Operator
Good day ladies and gentlemen and thank you for standing by. Welcome to Ovintiv’s 2022 Second Quarter Results Conference Call. As a reminder, today’s call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]
For members of the media attending in a listen only mode today, you may quote statements made by any of the Ovintiv’s representatives. However, members of the media who wish to quote others who were speaking on today’s call, we advise you to contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Ovintiv.
I would now like to turn the conference call over to Jason Verhaest from Investor Relations. Please go ahead, Mr. Verhaest.
Jason Verhaest
Thank you, operator, and welcome everyone to our second quarter ‘22 conference call. This call is being webcast and the slides are available on our website at www.ovintiv.com. Please take note of the advisory regarding forward-looking statements at the end of our slides and in our disclosure documents filed on SEDAR and EDGAR.
Following prepared remarks, we’ll be available to take your questions. Please limit your time to one question and one follow-up.
I will now turn the call over to our CEO, Brendan McCracken.
Brendan McCracken
Good morning! Thank you for joining us. Our second quarter results highlight our execution across the business and demonstrate that our strategy continues to generate superior returns. We are focused on both, the returns on the capital we are investing in our business, and the cash we are returning to our shareholders.
Our results reflect our unique combination of strengths, our innovative culture, our relentless focus on capital efficiency, our top tier assets, and our disciplined capital allocation. That combination of innovation and discipline is showing up in our numbers, as we make sure higher prices flow through to higher returns.
In a few minutes Greg is going to highlight how our innovation has us leading on several technologies that are the key drivers of returns today. The bottom line is that our capital efficiency has us generating $400 million more dollars free cash flow this year, than if we were performing at the average of our peers. By the way, that analysis uses a high quality group of seven of our peers and is done on a 20:1 BOE ratio, which is conservative for us relative to the 12:1 ratio that current spot places reflect.
With Greg covering the impact innovation is having on our results, Corey is going to share how our disciplined approach has us positioned to maximize our margins. We’ve added to our market access for our Montney production and 80% to 85% of our Montney gas is priced outside of AECO through 2025 when LNG Canada is set to be on stream.
We delivered our highest quarterly cash flow and free cash flow in more than a decade. This strong financial performance is translating directly to our shareholders, with increased cash returns. Earlier this quarter we announced the doubling of shareholder returns to 50% effective July 1.
We deliver this increase ahead of our original guidance due to tremendous balance sheet progress and strong underlying business performance. With this increased return profile, we’ll return almost $400 million to our shareholders in the third quarter and over $1 billion for the full year. Assuming current strip pricing, we expect this amount to more than double next year.
In addition to our increasing cash return profile, I’m excited to highlight strong underlying operational results. We achieved to the high end of our oil and condensate and total production guidance, beat consensus cash flow per share estimates and achieved free cash flow generation of $713 million.
Our full year CapEx guidance remains unchanged. Our team has put in long hours to find creative and innovative solutions to the supply chain and logistical challenges facing the industry today. It is through this thoughtful innovation that we’re able to maintain our leading capital efficiency versus peers and maximize the value we’re creating for our shareholders.
Corey, over to you.
Corey Code
There’s no doubt as shareholders we’ve benefited from a dramatically improved capital structure with less debt, lower interest cost and less financial risk. The most exciting part though is the dramatically increased capacity to directly return cash to our shareholders. We announced in early July that we would increase the return of free cash flow from 25% to 50% each quarter and that’s on top of a nice base dividend.
With this jump to 50%, we will deliver almost $400 million back to shareholders through buybacks and base dividends in the third quarter alone. This return is substantial and equates to over $1.5 billion on an annualized basis or a 13% cash return yield. This cash return yield more than doubles to 27% when removing the impact of our hedges.
Speaking about hedges, today we are less than five months away from realizing the benefits of our refreshed hedging program. The roll-off of our 2022 hedges and right-sized 2023 program are set to generate a meaningful step change in cash flow as we head into next year.
Our return profile has further upside potential as we eliminate additional costs from the business and continue deleveraging. Over time the business has the ability to increase returns beyond the 50% level as outlined in our capital allocation framework.
Finally and we’re noting, our cash return offering is underpinned by our sustainable and growing base dividend. We kept our based dividend intact through all of 2020 and have now raised it 3x or over 250% in the last 12 months including twice this year alone. We see our sustainable and growing base dividend as a core component of our value proposition for shareholders. We currently have a base dividend yield of about 2%, which is very competitive across industry and the broader market.
We continue to make significant progress in lowering the overall debt level in our capital structure. We reduced net debt by $610 million during the quarter to $3.9 billion. In addition to net debt reduction, we’re taking a proactive approach to reducing our absolute debt and the interest costs that go with it. Lower interest costs create additional room for base dividend increases over time.
In June we completed the redemption of our 2024 notes, which totaled roughly $1 billion. This redemption will generate about $55 million in annual interest expense savings. We’ve also been actively pursuing open market purchases of our senior notes, repurchasing approximately $60 million through the first half of the year. We will continue to be opportunistic on this front going forward as higher interest rates lower the price of these notes.
Our strong business performance has generated a trailing 12 month adjusted EBITDA, north of $4 billion, driving our current leverage ratio to 1x at the end of the quarter. Even after increasing cash returns to 50%, we still expect to return $3 billion net debt target before the end of the year. We also see the opportunity to continue to reduce net debt below $3 billion. This bolsters the resiliency of our business and positions us to withstand market volatility over the long term.
Greg will now cover some of our operational highlights.
Greg Givens
Capital efficiency continues to be a key focus for our asset teams across the organization. Our proven track record of industry leading efficiencies and strong culture of innovation are truly differentiating in today’s volatile commodity and macroeconomic environment.
No matter how you cut it, our 2022 program continues to rank top tier among our peers. We compared our capital efficiencies out of seven of our closest competitors. Now whether you measure it on an oil and condensate production basis or using total production on either a 6:1 or 20:1 basis, we are delivering more barrels and more BOEs for less capital.
This leadership translates to real money. If we were to assume our peer average for capital efficiency, we would have to invest another $400 million to deliver our 2022 program. Put another way, we’re driving an incremental $400 million of free cash flow generation this year, value that we’re returning to our shareholders.
As volatility and inflationary pressures continue to challenge our industry, we are responding with innovative solutions to make our business stronger and position us to excel on the road ahead. Our culture of innovation is something we take great pride in, and we see it as a real competitive advantage.
Innovation is more than simply applying the latest technology to our operations. It is embedded within the culture of our organization. It influences the way we approach challenges and manage complex operational objectives. It’s not something you can buy, it’s something that must be cultivated over time and it is delivering tangible results.
We are an industry leader in several key categories, including Simul-Frac, wet sand, drilling speed, supply chain and logistics management. In today’s inflationary environment, these were the categories that matter most. Our outstanding performance here was driving the strong capital efficiencies you see in our business today.
Our on-site wet sand storage solution in the Permian is a prime example of our innovation at work. To overcome sand hauling delays in the first quarter, we piloted an industry leading on-site wet sand storage system. This reduces trucking bottlenecks and is generating record completions efficiencies.
This solution was made possible by our stacked innovation approach. By combining the use of multiple innovations, Simul-Frac, local wet sand and house logistics and on-site sand storage, we’ve been able to achieve top-tier completion efficiencies, completing over a mile of lateral feat and pumping over 16 millions of pounds of sand in a single day. We’re confident in our ability to continue generating superior asset level returns as we push the frontier of innovation and capital efficiency.
In addition to our continued strong well performance, the second quarter saw a step change operational efficiencies. These efficiencies are a key factor in managing inflation in today’s environment.
In the Permian, our top tier completions performance delivered a 20% improvement in completed feet per day versus the 2021 average. Our pacesetter in the play came in at nearly 5,500 feet per day. In the Anadarko we continue to achieve strong drilling results with a record pacesetter of more than 2,800 feet drilled per day. Our second quarter average drilling speed was 20% faster than the 2021 average.
And finally, we continue to see drilling efficiency advancement in the Montney. We set a new drilling pacesetter in the quarter, achieving nearly 2,800 feet per day. On average we were 7% faster than our 2021 program and we’re drilling our longest laterals ever, up 9% from last year. These new pacesetter results reinforced the continued efficiencies our teams are striving for and achieving every day.
I’ll now turn the call back over to Corey.
Corey Code
In an inflationary environment with supply chain constraints, the benefits of higher commodity prices can easily be lost to higher costs; we’re not letting that happen. We’ve managed to keep about 90% of the increase in commodity prices over the past year. Our margin expansion continued in the second quarter with the realizable margin of 74%, up from 62% a year ago. This margin represents our realized price before hedges, less our cash cost.
Simply put, over the last 12 months our average realized commodity prices went up by about $30 of BOE. Our cost increased by less than $4 of BOE. When we look at our strong price realizations, our marketing team has done a great job in not only securing market access, but also ensuring we have a diverse portfolio of sales points for our products. Our second quarter unhedged realized price for oil and condensate was 99% of WTI or unhedged realized natural gas price was 95% of NYMEX.
One way we expand margin is by taking an active role in enhancing market access across the portfolio, work we’ve been out for over a decade. In the Montney we recently acquired transport for 245 billion BTU per day to the Chicago market. This additional transportation adds to firm access we already have to markets in Eastern Canada, California, the Pacific Northwest and the Midwest. It supplements our current portfolio of affirmed transport contracts and increases our Montney natural gas price exposure outside of AECO to approximately 80% to 85%.
This diversification is derived two ways: First, about 65% of our Montney gas production is shipped on pipelines out of the basin and delivered and priced at markets outside of the AECO. Second, about 15% to 20% of our Montney gas production is protected through basis hedges that transfer AECO exposure to NYMEX. We executed those hedges at between $1 and $1.10 behind NYMEX. The additional egress to Chicago will slightly increase our T&P expense beginning in the fourth quarter, but we expect to realize price premium to more than offset the cost.
I’ll now turn the call back to Brendan.
Brendan McCracken
Thanks Corey. We’re uniquely positioned as a multi basin producer with significant fixed scale in three premium North American plays. Through our meetings with investors and analysts, it’s become clear that there’s an opportunity to provide investors more insight into the value of our Montney. Our Montney asset is on track to deliver more than $2 billion in upstream operating free cash flow this year.
With this in mind, we think it’s critical for us to fully communicate the value of this asset. Our returns in the play are among the highest in the industry. We drill everything from prolific natural gas wells with production rates over 30 million cubic feet per day, to oil wells delivering more than 1,000 barrels per day. We have significant scale in the play with over a decade of premium oil inventory and well over two decades of premium gas inventory. We have the best capital efficiency in the play and we’ve drilled 13 of the top 15 Montney wells by production in the last year.
We invite you to save the date for our Montney webcast on September 19. We plan to have some of our Montney leadership team join us on the call, which will be followed by an interactive Q&A session. Stay tuned for the formal details, which we’ll include in a news release in early September.
Before we moved to the Q&A, I’d like to sum up the key takeaways from today’s call. Our team delivered a strong quarter. Cash flow per share and free cash flow above expectations, with capital below the bottom end of our guidance. Crude and condensate production at the top end of our guidance, and total production at the top end.
We’re pleased to accelerate the doubling of cash returns to shareholders by increasing our pay-out ratio to 50% of post dividend free cash flow in July. As a result of that shift, we’re delivering one of the highest cash return yield offerings compared to peers and the broader market. At 13% our cash return yield has been increasing and is poised to continue to increase this year and poised to more than double as we head in to 2023.
We are resolute in our determination to close the valuation gap between us and our peers. We’re doing that today by using our strengths to maximize free cash generation and allocating that free cash flow to buying back our shares.
Finally, our unique culture of innovation and discipline is driving execution excellence, positioning us as an industry leader across multiple key operational and technology categories. With more than 10 years of premium oil inventory and over 20 years of premium gas inventory across our portfolio, we expect to continue to deliver superior returns on both the capital we invest in the business and cash returns to our shareholders for many years to come.
This concludes our prepared remarks. Operator, we’ll now take questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Arun Jayaram with JPMorgan. Please go ahead.
Arun Jayaram
Yeah, good morning Brendan and team! Brendan, perhaps for you and Corey, I wanted to get your thoughts around you know how you’re thinking about capital allocation kind of next year assuming the strip holds. And just a thought, as you move towards your deleveraging target by the fourth quarter so, and you enter 2023, you know how do you think about balancing. You know you have the 50% minimal return to free cash flow. How do you balance that incremental cash return beyond the 50% level versus doing more debt reduction or building cash on the balance sheet?
A – Brendan McCracken
Yeah, good morning Arun. Thanks for a great question. Maybe just take the first part first. You know on 2023, clearly sitting here first week of August, it’s early in the process, but our strategy for capital allocation in 2023 in going to be unchanged from today. We’re going to be focused on maximizing returns, free cash flow and cash flow per share.
Clearly we want to look at several scenarios within, both at the high level of capital allocation, but also allocation amongst the plays and products. But you know what I’d just say to give you a sense of how we’re thinking about it, the signals we’re seeing today, probably biased towards another year of maintaining scale. You know we need to be convinced that any sort of modest growth would be clearly better on a risked free cash flow and cash flow per share outcomes, and really there’s kind of three things that we’re evaluating to look at that Arun. One is of course just the market fundamentals. You know is there a real demand call, and then of course our ability to maintain capital efficiency and returns in an inflationary environment is something we’ll look at.
And then of course for us, any investment in capital to drill wells must out compete the investment in share repurchases, so that’s a calculus that we’ve got to consider as well. But generally remember it’s the first week of August, so we’re going to have more information as we go through the rest of this year on those three items and we’ll get more conviction with time.
On your second part there around, you know how do we balance the allocation, the buybacks versus debt reduction. Clearly today we are doing both. At the 50% level we wanted to see debt continue to come down, but we don’t think net debt needs to be zero. And so you saw us double our shareholder returns earlier than guided. The cadence of cash returns have been really clear through the year. Just as a reminder, we returned $120 million in the first quarter, $200 million in the second quarter and now close to $400 million this quarter.
So there’s a pretty clear pattern of what we’re doing there. And so our commitment is at least 50% and that’s where it’s at this quarter, but we’ve got the ability and optionality to do more than that if it makes sense as we proceed.
Arun Jayaram
Great! Thanks for that answer. Corey, I wondered if you could give us, we’ve getting a lot of byside questions on the impact of the AMT on companies such as Ovintiv that have an advantage, U.S. tax positioned. So I was wondering if you could maybe get your thoughts. I do know it’s subject to a three year average book income threshold of $1 billion or so. So maybe you could give us some thoughts on potential impact to cash flow and how this could impact or what’s the treatment on Canadian earnings.
Corey Code
Yes, so you’re right, and thanks for identifying that’s kind of a key feature to the whole language the way it’s drafted. But if you – it’s a three year historical average to be above $1 billion, right. So if you think about 2023, that would be you know 2020, ‘21 and ‘22 would have to average $1 billion and for us as much as we don’t want remember 2020, that was when we had the pretty significant ceiling test impairments. So you know net loss in that year is over $6 billion.
So even though strong earnings this year, it’s going to be hard for us to get to a position where we’ll be over that $1 billion. So for 2023 even if it’s passed, the AMT has written that shouldn’t have an impact on us.
You know obviously going forward, 2024, that could be a calculation that we would be subject to and that would bring forward you know our tax horizon in the U.S., probably from a 2025 period it might bring it forward one year, and you can kind of think about that as a prepayment of the 25 and 24 from that perspective.
Operator
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta
Yeah, I appreciate you taking the questions. The first is just around regional gas basis. We noticed you added some takeaway solution in the Montney. Now, 80% to 85% of the gas is priced out of AECO and 80% outside of Waha. Just talked about the way you’re thinking about basis and managing that risk and how you see it playing out from here?
Brendan McCracken
Yeah, thanks Neil, I appreciate the question. Really if you look at our strategy across the assets, particularly on gas, one of the things we like to do is make sure we get a price diversification that we don’t get exposed purely to the basin pricing, and so you can see that play out in our actions where we‘ve acted in both the Permian and the Montney proactively to move our gas outside the basin and get pricing outside of Waha in the Permian and outside of AECO in the Montney. So we are quite well positioned in both of those places, which is what we’ve highlighted here now, so you got the numbers right.
So from 2023 to 2025 its 80% to 85% of our AECO gas – sorry, our Montney gas priced outside of AECO. And then for the critical 2023 period, when there could be basis pressure on Permian gas because of the lack of takeaway, you know we’ve got that transport fully secured and priced outside of – a great deal that’s priced outside of Permian, so.
Neil Mehta
No, that’s helpful. And then Brendan could you talk about capital efficiency. It was a huge focus obviously in the first quarter, and you were able to maintain the capital spend for the year in this update. Just how are you thinking about that as you move into 2023? What are some of the moving pieces around the components of inflation and how are you as an organization mitigating it?
Brendan McCracken
Yeah Neil, I appreciate it. I mean, and there’s really kind of two pieces that I think are important to highlight on capital here. One is of course the trajectory, which lots of investor focus on the trajectory of sequential changes. But the other piece that we’ve tried to highlight in the materials today is where you add on capital efficiency. So you know its one thing to – and of course we didn’t change capital this quarter, so our trajectory is unchanged. But the other important feature is absolutely where we’re at. Well, we are amongst the very best on capital efficiency, so the starting place is a great place as well.
We are in good shape here through the rest of this year, a great deal of the program priced and have confidence in the capital guidance that we’ve got out there. I think as we look out into next year, which I think is kind of what you were asking. A number of the pricing agreements that we had in place today are rolling off, so we would be subject to a higher market price for some of those goods and services. So what we’ve guided investors to think about is maintenance level capital. For us is sitting here today recognizing it early, but it’s looking like its 10% to 20% higher than current capital when you look out to 2023.
Operator
Your next question comes from Jeanine Wai with Barclays. Please go ahead.
Jeanine Wai
Hi! Good morning, everyone. Thanks for taking our questions. We’d just like to follow up on your prior comments about capital allocation and again just revisiting what you’re going to do with all this cash, in particular maybe on the mechanics on the debt side. So you took out the 2024 notes as planned and then you did about $60 million of open market repurchases. You know what is your appetite on really trying to get after paying down the 2026 plus type maturities? Are you willing to make whole premiums? Are you looking really to just do things more opportunistically in the market?
Brendan McCracken
Yeah, thanks Jeanine, I appreciate the question. I’ll just turn it over to Corey there on how we’re going to think about those absolute debt reductions.
Corey Code
Yeah, hey Jeanine, its Corey here. Obviously the higher interest rates make these no take-outs much more attractive than they would have been six to nine months ago, and we’ve even got debt that’s trading below par once again. So you know for us, you look out at one of the benefits of higher prices. It means we’ve got excess free cash flow and we can take out some of the debt either in a discount or at a really short payout, because if you look across our debt stack, we’ve got a number of high coupon notes that we’d like to start to manage down.
So you know we’ll balance the optionality on taking out the 26’s with trying to bite the opportunistic and buy out different parts of the curve, which will help us reduce interest expense, but we can do that at a relatively low cost and probably don’t need to go into May call like a lot of those are trading kind of in the 105 range, even for the higher interest rate notes.
A – Brendan McCracken
Yeah, and Jeanine, if you watch what we did with the 24’s, is when we took those out, we took them out I think about six months early, so we didn’t wait for the maturity there. We balanced the sort of interest remaining and the premium to take them out early and once that got into the right zone, we acted. So I think that’s probably a good pattern for how we’ll think about it going forward.
Jeanine Wai
Okay, great! Lots of optionality there with the cash. Maybe just moving on to operations and the guidance, the 4Q guide calls for an increased quarter-over-quarter in oil, but it looks like NGOs and that gas is going to be flat. So any color there on what’s driving this and maybe any commentary on what the exit rate could be for the year? Thank you.
A – Brendan McCracken
Yes, it’s really just the well mix across the asset and when they are coming on stream. So our third quarter turn-in lines is our biggest quarter of the year by a decent margin. So you know as we March our way through the third quarter here, we’ll see a number of wells coming on stream in the oiler plays and so that’s really what’s driving that production shape, and then you got a fairly consistent profile in the Montney of turn in line. So that’s really what probably drives the NGL and gas shape the most. So it’s really just a reflection of that timing and cadence of wells coming on stream.
Operator
Your next question comes from Doug Leggate with Bank of America. Please go ahead.
Doug Leggate
Oh thanks! Brendan, I wonder if I could pick up on your comments about inventory debt. You talked about more than 10 years of oil and more than 20 years of gas, and I guess I’ve got two questions here. My first one would be, I wonder if you could just maybe frame your thoughts on the gas market. Clearly we’ve seen a reset in U.S. volatility, but I’d really love your perspective on the Canadian gas market as you see LN – you know kind of the LNG you know move forward towards the middle of the decade.
And then the related question is with the relative inventory debt that you have, how do you think about the sustaining capital that’s always referred to oil as opposed to resetting the capital allocations towards growing gas.
A – Brendan McCracken
Yeah Doug, I appreciate the questions, thanks for that. You know really quick on gas, macro views. You know increasingly constructive I think would be the way we’d characterize our views here.
You know there’s a ton of high quality gas resource in North America and we’ve known that as a sector for a while. Clearly we have a big chunk of it in our portfolio, so we understand it very well. But the piece that’s really shifted here of course is strong global demand for gas and the increasing connectivity between North America and global markets. And then also the sort of layer on piece is just the huge challenge of building infrastructure to connect gas resource to markets and we do see you know a need for clear energy policy in both the U.S. and Canada to address the world’s need for natural gas.
But we also see that that pathway is likely to be difficult, at least in the near to medium term, and so that kind of high demand with challenge connecting the resource to the market does make us more constructive for benchmark prices, both globally and for NYMEX and so you know that’s great news for us, because we think we’ve got this incredible gas option in the portfolio today and clearly that’s something we’re going to talk about more on the Montney webcast.
But, you can also see in our actions, one of the things that we think is critical is making sure that you can get that gas-to-market and you can get it to market at an attractive price, and that’s why we’ve moved to ensure that we’ve got great market access for our Montney and great price diversification for our Montney.
You know with respect to your question on capital allocation, I think the way to think about it is we’ve got great optionality there, and as we start to design the 2023 capital program, we’ll be looking for how to maximize free cash flow and cash flow per share and returns, and so that is a lever that we can pull on. You know if you look at our historical Montney capital allocation, we’ve done over $400 million there in recent years. This year I think the midpoint of guidance is about 325, so there’s clearly room for us to do a little bit more in the Montney if we choose to.
Doug Leggate
Sorry Brendan, just to be clear on the 1.7 to 1.8, is it fair to assume that before considering inflationary effects, that numbers remains in place, but the swing within it, is it right to think that that could go above more towards Montney perhaps?
A – Brendan McCracken
That’s right Doug, and you know the 1.7 to 1.8 is really keeping us flat on BOE’s gas and oil. It’s a fairly balanced approach today, so you know it would be something we’d have to be – have a great deal of conviction in to really massively swing the product mix around. So I think our starting point would be – if it was a maintenance level choice, our starting point would be you know just maintaining and across the board.
Doug Leggate
Okay, thanks guys.
A – Brendan McCracken
Yeah.
Operator
Your next question comes from Neal Dingmann with Truist. Please go ahead.
Neal Dingmann
Good morning! Brendan, my questions on strategy, just based on something just kind of around Doug’s question. You mentioned something on per share growth. So I guess my question is, how do you view the best way to grow this business per share, you know when you consider either production growth or obviously the unique shareholder returns plan that you’ll have laid out.
A – Brendan McCracken
Yeah. Well, I think that’s – I think your question is how we think about it Neal, is really just laying those two alongside each other and looking at them on a risk basis over time, you know because this of course is not an instantaneous effect. We’re looking to deliver a sustained effect, we are looking to deliver. So you know that’s really how we are thinking about the right capital allocation as we head into 2023 and just competing and comparing across those two choices. So you know clearly where our valuation sits today makes the buyback pretty attractive.
Neal Dingmann
Yeah, I would agree. And then on the second question, likely for Greg. Greg, just on what this place you guys now have done a good job getting your hands around that. I like you know you put out slide seven. Others similar in the past, we have shown a lot of the information at Simul-Frac and different things you are doing.
I’m just wondering is this – a lot of folks have talked about – I don’t know if you and Brendan are prepared to talk about what you might, how you are thinking about sort of inflation in to ‘23 and beyond that. You know again if you are thinking inflation might go up, you know do you have to do more contracting of rigs, you have to kind of lock in pipe, you know is there more of that now needed than there has been in the past.
Greg Givens
Yeah, I think Neal, you know really you might have missed it before, but I did signal a maintenance capital program sitting here knowing what we know today, recognizing its August. You know our range that we’ve put on, it’s probably 10% to 20% up from the 2022 guide number and really that just reflects the number of the pricing agreements that we have in place today, rolling over and having to re-price that market. So you know we don’t know what that market will be. We still got a few months to really kind of get that price discovery work done.
On your question around locking in services, I mean on long lead items, particularly steal, this is a place where we are already engaged in, in ensuring that we’ve got that secured and to some extent priced heading into next year, and then we’re at the very early stages of locking in some rigs and spreads through 2023. But we only ever see us do that on a portion of the program. You know we’re never going to lock in the whole program, because that flexibility is valuable, because we do live in a volatile commodity industry.
Neal Dingmann
Well, thank you.
Greg Givens
Yeah, thank you.
Operator
Your next question comes from Greg Pardy with RBC Capital Markets. Please go ahead.
Greg Pardy
Yes, thanks for the rundown. Brendan, you mention just the hedges rolling off earlier in the call. Is – could you just maybe remind us of what you’re hedging strategy is and is the change, is the pivot kind of a function of the market call or balance sheet improvement or both?
A – Brendan McCracken
Yeah Greg, we really appreciate the question actually, because that’s an important piece for us. So you know late last year we did change our hedging policy and pretty substantially. So we moved to what I kind of referred to as a pure risk management hedge approach and really reflects the progress that we’re making on the balance sheet. And so if you look at our history over the last several years, we’ve been quite heavily hedged, like three quarters of production hedged and really as we saw the balance sheet improving, we saw the need to hedge go down materially.
And so today the way we are hedging is, we’re hedging to manage the risk of a very low period of commodity prices, and what we’re doing is – you know what drops out of that is we want to be able to protect the business against those low prices and still be free cash flow neutral or better after the base dividend, and so what you’re seeing us do is hedge about 20% to 25% of production. We’re doing it a quarter at a time, four quarters out. So if you look at our disclosure today you can see the first quarter ‘23 and the second quarter ‘23 books are done, and we’re part way through building the third quarter ‘23 book today.
And so the other aspect that I’ll call attention to is we’re using three way vehicles to make sure we can put a floor in that we’re comfortable with and manages that risk of low prices, but also gives exposure to the upside, and we’re quite pleased with how we’ve been able to do that. If you look at our book today, I think it reflects that approach and gives us that upside exposure while still providing that downside protection in the event of a unforeseen commodity price drop.
Greg Pardy
Okay, I get it. Thanks for that and I know we’ve talked about cash taxes, but maybe Corey we’ve talked before, you mentioned before you know no material cash taxes for kind of five years. Has that overall picture changed with your spending and just given high prices?
Corey Code
Oh hey Greg! Yeah, a little bit. I mean last time I think we officially talked about it would’ve been in February and so obviously prices are dramatically higher today than they were at that point in time. But you know if you think about our business domestically in the U.S., we exited last year with about $5.3 billion in NOL’s and so even at today’s prices we think that cash tax rise and puts us kind of out into 2025, and I did give a little bit of that AMT color earlier, which could move that around by year.
In Canada, obviously the strong gas prices have a bigger impact. We highlighted that in our Montney teaser there with $2 billion of free cash flow in the asset. We exited last year with about 800 of NOLs there. So if you think about the cash tax in the Canadian business, that’s probably come forward as we could have minimal to $100 million next year in that business if prices stay really high.
So if you think about kind of a cut off there, think about like $5 as your trigger point to where you might have some cash tax in the Canadian business next year, but it’s really more in the order of magnitude of small hundreds of millions as opposed to cash taxable for the whole enterprise.
Operator
Your next question comes from Gabe Daoud with Cowen. Please go ahead.
Gabe Daoud
Thanks. Good morning everybody! Brendan, just curious if you could maybe give us an update on thoughts around M&A and continuing to do some bolt-on’s. I believe the previous figure you cited was a couple of $100 million bucks for bolt-on sticking out of free cash flow, is that how we should still think about it?
A – Brendan McCracken
Yeah, hey Gabe! Yeah, no change to our strategy here. The bolt-on approach is working really well for us. Since we launched that last September, we’ve added over 140 net locations to our premium inventory inorganically for around $30 million. So the math on that is fantastically accretive and we continue to see that to be a good complement to the organic portfolio renewal that we’re also undertaking that added about 500 locations over that period, so we really like that.
I think with regards to sort of large M&A, we just continue to see that and don’t compete with our other capital allocation options, especially the value we see in our own equity. So no change to our strategy on the M&A front.
Gabe Daoud
Great! Thanks Brandon. Super clear. Maybe just a follow-up, could you give us an update around permits in the Montney. Is there anything to highlight there. Thanks guys.
Brendan McCracken
Yeah, thanks Gabe. So on the Montney side, on Blueberry River First Nation permits issued, we remain encouraged there. The province in the treaty at First Nations have got an encouraging high level framework deal in place and we see the province starting to work through the permitting backlog.
So, as you sit here Dave, we got all the permits for our 2022 program and we’re over a third permitted on 2023. So we’re watching it closely, and clearly it’s going to be something we’re going to want to see in place as we get through the rest of this year, before we land on a definitive capital allocation there.
This is the great part of the multi-basin strategy, is that we’ve got the ability to rotate that capital into either the Alberta side of the Montney or into other parts of the portfolio and generate the same corporate return. So regardless for the outcome, we are in good shape here, but it is encouraging to see some progress there.
Operator
Your next question comes from Menno Hulshof with TD Securities. Please go ahead.
Menno Hulshof
Good morning, everyone. I think I’ll start with the pacesetter data that you talked about earlier that references roughly 2,800 feet per day for pacesetter drilling and give or take 5,500 feet per day for pacesetter completions; those are obviously big number. So maybe you can comment on where you think we stand in the innovation cycle and whether you’re seeing those improvement curves starting to flatten out and on a related note, what is your inflation estimate net of efficiency gains or is that already captured in the 10% to 20% that you talked about?
Brendan McCracken
Yeah Menno, great questions. The innovation innings game has been one we’ve talked with, in the market about for a number of years now and I think what’s always shown up is the right, the smart bet was always to bet on the innovation, and bet on further efficiency gains and we believe that deeply here and as Greg said, it’s really kind of a cultural piece for us. There’s always another layer to unwrap and drive costs down.
And so you know we are excited about those pacesetters, because they represent big step changes from the averages of where we’ve been and so it just tells us there’s more to play for and we’ve talked about this before. But what we’ve seen time and again is once we are able to do it on a pacesetter, then the question is just all about repeatability. So that’s kind of the approach we take to work our way through this and turn pacesetters into quarterly averages over time.
So the second part your question is really around – you know is the efficiency gain baked into that 10 to 20 and it is, that’s why the range is so large sitting here today, because we are going to continue to learn through the back half of the year on how much of those pacesetters we can convert into repeatable averages, but we’re also going to learn more about where the market sits on pricing. So trying to take that into account, but lots of uncertainty on both sides of that calculation right now.
Menno Hulshof
Yeah, thanks Brendan, that’s helpful. Maybe I’ll follow up with a question on electrification of your operations and fleets. There is a reference to it in your sustainability repot. So how much of a priority is that? What are you seeing in that process and maybe you can just remind us of the more nuanced operational benefits of going electric outside of the obvious stuff like decarbonization?
Brendan McCracken
Yeah, the – you know electrification is a piece of our emissions reduction plan. We have a target to reduce GHG intensity by 50%. We are sitting here about halfway through that target on our actuals that we released last quarter in our sustainability report. So great progress on that, and some of that electrification is in our ongoing production operations where we were able to take emissions out of places like compression and so forth. And then the other place that it’s in is in our drilling and completions business.
Now, the DNC emissions are a smaller piece of the overall emissions pie for us and so we’re really driven by the returns and the ability to displace higher cost diesel, particularly in today’s environment with either natural gas or electricity direct from the power lines. So that’s the primary driver, and then of course we look for a secondary gain on the emissions reduction to complement that, but it’s really the returns that are driving us there.
Operator
Your next question comes from Geoff Jay with Daniel Energy Partners. Please go ahead.
Geoff Jay
Hey guys! Congratulations on being in the verified there of not having any CapEx increases for the quarter. I’m just kind of curious, you know in terms of to kind of follow-up in Neal’s question earlier, how sort of locked in do you think you are for the year? Kind of 80%, 90% or is this somewhere in the room. And then I guess secondarily, was there any capital associated with the divested assets in the old figure or not? Thanks.
Brendan McCracken
Yeah, Geoff. No, I appreciate the questions. Yeah, I’ll take the second one first, so no, there is essentially zero capital in those divestiture assets that the Uinta and Bakken assets that we sold really were not attracting capital. They were high cost mature assets that didn’t have inventory associated with them.
By the way, they had almost de minimus cash flow associated with them as well, because of that high cost structure. So it was an excellent time in the market to divest them for the proceeds that we did.
And then the question on how locked in we are, you know fairly locked in. We did do that earlier this year where we saw the opportunity to add locked in prices for things like steel. We were already fairly locked in on the DNC services, so it’s a pretty high percentage for us.
Geoff Jay
Excellent! No, that’s helpful. Thanks a lot.
Brendan McCracken
Yeah, you bet. Thank you.
Operator
At this time we have completed the question-and-answer session, and we’ll turn the call back to Mr. Verhaest.
Jason Verhaest
Thank you, operator, and thank you everyone for joining us on the call today and for your continued interest in Ovintiv. Our call is now complete.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day!
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