Ovintiv Inc. (DE)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to OVINTIV's 2022 First 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. Members of the investment community will have the opportunity to ask questions and can join the queue at any time by pressing star 1. For members of the media attending in a listen-only mode today, you may quote statements made by any of the OVINTIV representatives. However, members of the media who wish to quote others who are 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 express consent of OVINTIV. I would now like to turn the conference call over to Mr. Jason Verheest from Investor Relations. Please go ahead, Mr. Verheest.

Thank you, Operator, and welcome to our first quarter 22 conference call. This call is being webcast and the slides are available on our website at oventive.com. Please take note of the advisory regarding forward-looking statements at the end of our slides and in our disclosure documents filed on CDAR and EDGAR. Following prepared remarks will be available to take your specific questions. Please limit your time to one question and one follow-up. And I'll turn the call over to our CEO, Brendan McCracken. Good morning.

Thank you for joining us. Quite a lot has happened since we reported our year-end results. Commodity prices have increased significantly due to unfortunate geopolitical events and continued supply chain disruptions across the globe. We're disheartened by these events and hope that they resolve as quickly as possible. Our team is dedicated to responsibly producing our barrels and BTUs to provide the world the energy it needs. I'd like to kick off by covering some of today's key highlights. Our strategy is continuing to lead to strong returns on both the capital we are investing and the cash we are returning to our shareholders. We're delivering those returns while continuing to strengthen the balance sheet, drive ESG progress, and generate leading capital efficiency. We are once again raising our base dividend This 25% increase marks the third raise in the last 12 months and reflects the structural cost reductions and efficiency gains we've made in our business to drive our breakeven price lower and unlock a higher sustainable dividend. We are also confirming the doubling of our shareholder returns starting October 1st. We are making tremendous progress on reducing debt and want to solidify the timing of our cash return inflection. This plan sets us up to deliver $1 billion of cash return to our shareholders this year. With that said, debt reduction still continues to be a key priority, and we have line of sight to achieving $3 billion of net debt in the third quarter. We're also making progress on our absolute debt and issued notice to redeem the entire principal amount of our outstanding 2024 notes, roughly $1 billion in total. In addition to financial and operational excellence, we're proud to continue to demonstrate leading ESG performance. Yesterday, we published our 2022 Sustainability Report, which highlights strong year-over-year progress across a wide range of key performance metrics and marks our 18th consecutive year of transparent ESG reporting. Finally, we're maintaining an intense focus on capital efficiency. Our 2022 outlook is robust, and the team has continued to drive innovation to offset inflationary pressures seen across industry in the broader market today. Our 2022 plan is set to deliver about $5 billion of cash flow at a price deck of $100 WTI and $6 NYMEX gas. We're committed to capital discipline, and we're reinvesting less than 35% of this cash flow, allowing us to utilize the remaining 65% plus for dividends, buybacks, and debt reduction. And while we've increased our capital guidance to align with our current expectations for cost inflation and to keep our high spec equipment and preferred crews running for the remainder of the year, our 22 plan still ranks among the top of our peer group in capital efficiency. Greg will speak more to this later in the call. Given our significant 2022 cash flow profile, we want to provide clear and transparent timing for our upcoming shareholder return increase. We will double our returns to 50% of after base dividend free cash flow starting on October 1st. Over time, this return profile has upside potential as we continue to deleverage and take costs out of the business. Today, our actual second quarter annualized cash return yield is approximately 6%. We're doing this while we continue to rapidly reduce net debt. This metric almost doubles to 10% as we move to our 50% shareholder return distribution and jumps to 18% if you remove the impact of hedges. I'm excited to highlight that this 18% cash return yield is attainable in the near term as our hedges roll off and this return outpaces both the industry and broader market offerings. A strong driver of our go-forward cash return offering is a refreshed hedge profile. Today, our first half 2023 hedge book is complete and equates to about 20% to 25% of production, while also providing upside participation north of $110 WTI and $7 in IMAX gas. This revised approach is set to deliver significant cash flow expansion in 2023 and allow us to return significantly more cash to shareholders on a go-forward basis. Despite a few headwinds in the quarter, we delivered solid results, generated significant free cash flow, and directed a substantial amount of cash to shareholder returns. We generated more than $1 billion of cash flow, along with free cash flow of $592 million. We returned approximately $123 million to our shareholders, or 38% of our fourth quarter 21 free cash flow, through the combination of share buybacks and our base dividend. Through the corridor, we largely offset growing inflationary pressure on capital. This is something we've been intensely focused on mitigating for the better part of last year. On the production front, we produced 500,000 BOEs per day, above the midpoint of guidance. We came in above our guidance range for natural gas, and we were within the range on total liquids. We also saw very strong realized pricing across each of our products. Our oil and condensate production was slightly below our guidance for the quarter. We lost roughly 3,500 barrels per day from a combination of higher Canadian royalty rates, which are directly correlated to higher commodity prices, operational delays, and weather disruptions. With that said, our 22 plan remains strong, and we expect our production profile in the second half of the year to match our original plan. Our substantial free cash flow generation, declining leverage profile, and near-term inflection to higher shareholder returns continue to differentiate us as an investment opportunity. I will now turn the call over to Greg to talk about our operational highlights.

Thanks, Brendan. I'd like to discuss our thinking on our capital guidance. While many of our peers increased their Stay Flat capital budgets by 15% to 20% last quarter, We were alone in maintaining our original 2022 guide. We came into 2022 anticipating over 10% inflation, but we had line of sight to ongoing efficiency gains that would fully offset that. Our team did a great job delivering on those efficiency gains, and we were largely successful in Q1 at offsetting inflation. 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. This has led us to update our full year capital guidance to $1.7 to $1.8 billion, with the large part of this additional capital directly tied to inflationary pressure on commodity-based items such as steel-related costs, diesel, and labor. Additionally, We are adding a modest amount of capital to this year's plan exclusively dedicated to keeping our high spec equipment and simulfrac 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 take care, 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. Just like our original budget, the capital spend is weighted to the first half of the year. We will spend approximately 60% of our capital in the first two quarters on high working interest long lateral developments. These wells will come online later in the second quarter and early in the third quarter, increasing our production in the back half of the year. In the second half, we will shift to lower working interest developments, including the BC Montney, to spend the remaining 40%. You should think about our program as 60% of the capital in the first half, with 60% of the wells coming online in the second half. This capital and production profile is unchanged from our original budget. At the end of the day, this revised plan still represents an industry-leading capital program and reflects approximately 12% of incremental inflation compared to last year's results. We have also updated our full-year oil and condensate production guidance to 180,000 to 185,000 barrels per day. a modest 1% lower at the midpoint than our original guide. This is the result of a combination of higher royalty rates in Canada tied to higher commodity prices, weather impacts in the first half of the year, and some minor sand logistics delays that push back first quarter turn in lines timing in the Permian. Our 2022 program continues to rank top tier amongst beers, whether you look at it on a dollar per BOE basis or on a dollar per barrel of crude and condensate. Our proven track record of industry-leading efficiencies and strong culture of innovation are differentiating in today's volatile commodity and macroeconomic environment. The implementation of our new Permian onsite wet sand storage system last quarter is a perfect example of our innovation in action to quickly adapt to today's supply chain and logistics volatility. In order to overcome sand hauling delays that we were experiencing, we applied a new approach to sand storage onsite. This resulted in a new completion efficiency pace setter for the company. By combining the use of simulfrac operations, our local sand mine sourcing, and this new system, we completed over 5,400 feet of lateral and pumped over 16 million pounds of sand in a single day. This new approach effectively reduces sand hauling as the critical path for efficient completion operations. In the Anadarko, we successfully delivered a very high completion efficiency as well. and brought on line four 15,000 foot laterals, which are some of the longest laterals drilled to date in Oklahoma. Finally, we continue to set records in the Montney. This past quarter, we drilled our fastest pipestone well ever with an average drilling speed of over 2,150 feet per day. We've also started receiving some of our permits from British Columbia and have resumed drilling and completion operations. Although reducing well costs in today's environment will be difficult, Our mentality of never being satisfied with today's operational execution and continuing to achieve pacesetter performance will be foundational for achieving lower costs in the future. I also want to provide you an update on our successful transition to longer laterals across our portfolio, and especially in the Permian. Longer laterals are one of the keys to our capital efficiency. Our first quarter Permian wells averaged just over 14,300 feet, a new record. In addition to drilling and completion operational execution, we've been successful at enhancing our production and artificial lift techniques to effectively produce these longer lateral wells. This has resulted in consistent normalized production rates across our acreage position. I'll now turn the call over to Corey.

Thanks, Greg. The work that Greg's team is doing to combat cost inflation across the board and the outstanding efforts of our marketing team to secure market access And diversity for our products is translating into significant margin expansion. Year over year, we saw about 90% of the higher commodity prices preserved as margin expansion before hedges. Our first quarter average unhedged realized price for oil and condensate was 99% of WTI, while our unhedged realized natural gas price was 94% of the NYMEX benchmark. Our realizable margin has also increased to 70% from 61% this time last year. This margin includes our G&A and operating costs and underpins the efforts we've been making to not only capture but increase margins in our business. The blocking and tackling we're doing across the business to drive margins and cash flow is increasing our financial strength and accelerating our pace of debt reduction. These structural enhancements deliver growing shareholder value in the form of a sustainable and increasing base dividend and a doubling of shareholder returns later this year. As I mentioned, our financial strength continues to improve at a rapid pace. Since the end of the quarter, we've seen the reversal of some working capital items, and as of the end of April, we had a cash balance of approximately $680 million, taking net debt down by about $400 million to $4.1 billion. This represents a reduction of more than $3 billion, or more than 40% from the second quarter of 2020. The rate of change has been impressive. We are investment grade-rated by all four rating agencies. We recently renewed and extended our credit facilities out to July of 2026, and with the redemption of our 2024 nodes, our debt maturity ladder is very attractively positioned. While we expect to reach our $3 billion net debt target in the third quarter of the year, we don't see this as a stopping point for debt reduction. We are taking a prudent approach to managing our balance sheet, and we see continued benefit to the organization from further deleveraging. We're highly cognizant of the ongoing need for resiliency in our business, and we're committed to preserving our financial strength over the long term. And I'll turn the call back to Brendan.

Thanks, Corey. We believe we have a responsibility to reduce our environmental impact while we produce safe, reliable, and secure supply of the products that make modern life possible. Yesterday, we published our 18th consecutive sustainability report, which showcases how the efforts of our team are delivering strong results across our key performance metrics. I'll take a moment to cover a few of the highlights. We dropped our GHG emissions by 24%. We've now lowered our methane emissions by 50%, and we've fully eliminated routine flaring, and we've reduced total flaring and venting by 43%. Our spill intensity is down by 25%, and we are very proud to have recorded our eighth safest year ever. We believe that every day presents an opportunity to innovate and make improvements. Our high standards for ESG performance have been embraced by our teams and are a key element of our commitment to operational excellence. We're delivering on every aspect of our strategy. We continue to reduce net debt, drive efficiency gains, generate significant free cash flow, deliver superior returns on our capital invested, and return significant cash to our shareholders, all while making meaningful ESG progress. The competitiveness of our multi-basin, multi-product portfolio and the agility of our operations offer multiple pathways to deliver the best corporate outcomes and drive those superior returns. We're one of the most efficient operators and we are intensely focused on making sure that this capability translates into value for our shareholders. With the latest increase to our base dividend and the upcoming doubling of direct shareholder returns, we're set to return a billion dollars of cash directly to our shareholders this year. This represents a compelling cash return yield for our investors, and we see this growing substantially as we look into 2023. Our performance is the result of a world-class team, a high-quality portfolio of assets, a unique culture of innovation, teamwork, and discipline. This concludes our prepared remarks. Operator, we're now prepared to take questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, team, and thanks for the update here. I wanted to start on the inflation point. Can you just break down how much of this is due to materials versus equipment versus labor? And as you think about 23 recognizing we're still over six months away, but how much of the inflationary forces that we're seeing this year are carry in to forward years in your view of normalized?

Yeah, thanks, Neil. So obviously this is a space where we've done a lot of work recently. You know, really the majority of the inflation that we're pointing to today is in the categories that you just mentioned there. So steel, fuel, trucking, and labor. Those are the pieces that are showing up and resulting in the increased capital guidance that you see today. You know, We came into the year with high confidence that we could offset over 10% inflation with the efficiency gains that we saw occurring in the business. As a result, we were the only EMP that didn't bake in an increase year over year in capital. And we've successfully offset that inflation in the first quarter here. And really what we're seeing is the higher commodity prices than our original guidance and the global impacts in the supply chain. are just setting inflationary pressure higher in those categories, steel, fuel, trucking, and labor, than we had anticipated, and so that's been the big driver. I think as you look out through the rest of the year into 2023, it's obviously a bit early to make any sort of call on 2023, but clearly what we've tried to do is get out ahead of it and be very transparent with the market on how we see it unfolding over the rest of the year.

Okay, that's good perspective, and it The second is a little bit related to the catalyst path for the stock. In the last five days, we've seen quite a drawdown in the share price, even on a relative basis, even though it's been a very good last couple of years. So just talk about when you see yourself in a position to get more aggressive around share purchases if you agree that this is a valuation dislocation. I think it's when you get to that $3 billion in net debt. And then also any update around S&P inclusion, if that could increased generalist interest in the story. Thanks again.

Yeah, thanks, Neil. You know, so clearly we don't control the valuation directly, but what we do control, of course, is our strategy, capital allocation, and our execution. And so that's why we've taken a fair bit of time today to outline the value proposition that is firmly intact here. You know, we're delivering more free cash flow, more cash returns than what we guided to in February. Some 80% of the price increase is flowing directly through to our free cash flow and the shareholder returns. And that's a metric we keep a close eye on. You know, I think the billion dollars of cash return that we've outlined this year as you look out into 2023, is set to be, you know, well in excess of $2 billion as we look out into 2023 if prices hold. And so we're pretty excited about that, and we're excited about what that means for the value proposition for shareholders and the valuation of the equity. Just quickly on the S&P, you know, this continues to be one that we're keeping an eye on. We don't control inclusion at all directly, but... But obviously, we'll need another quarter under our belts to get positive earnings back after the mark-to-mark loss impact in the current quarter.

Your next question comes from Neil Dingman with Truist Securities. Please go ahead.

Morning. Maybe just a follow-on, maybe a question for Greg on office and place and logistics and a little bit what Neil was just asking. Greg, you know, can you all speak to Your future OFS contracts, I know you guys, when we met, you guys continue to do a great job there. And I guess my main question is maybe not just on the inflation, but more on logistics. You know, given you all are running that type of program, the three Permian and then two rigs and the other three areas, you know, it's obviously always more challenging with logistics when you're trying to time completions and different things. So I'm just wondering, is it just longer-term contracts that give you both, again, either rigs and fractions, to give you the confidence of that? Or, you know, what are you all able to do to ensure more on the timing that these things get completed on time such down the road?

Neil, thanks for your question. And that is something we spend a lot of time working on. And that's why one of the reasons we updated our guidance this quarter was we find it to be very important to secure the high quality equipment and crews that we need to execute on our programs. we do think our ability to execute is one of our differentiating characteristics. And so we have longstanding relationships with our suppliers of both steel and of the rigs and the crews that we use. And we enter into a variety of different types of contracts to ensure we have access to those crews. As we've talked previously, we've worked real hard to take the white space out of the schedule. But what that means in a year like this where we are continuing to get more and more efficient We create a little bit of white space towards the end of the year, and that's why we make sure that we have got the activity and the contracts in place to secure that equipment for next year. So we feel like we have the crews we need, the equipment we need, and we're working to ensure that all of that's working together to deliver this year's program and set us up well for 23.

You know, Neil, just before you go to your follow-up, the The point I'd just add to Greg there is, you know, in addition to being well positioned with the equipment, crews, and materials we need for the year, that gives us the confidence. I just want to pick up another point Greg made in the prepared remarks that, you know, on a percentage basis, we've got 60% of our turn-in lines coming in the second half of the year, which is really what's going to drive that higher production profile in the back half of the year. And so that's really what's giving us the high confidence on that delivery.

That's a great add-on. Maybe just my follow-up, maybe for you or Corey, mostly I'm just wondering on natural gas opportunities. Specifically, can you speak to, I was looking at your slide 23 that shows some of the details on the Permian and Motton EFT, and then you obviously also have great opportunities with the Anadarko gas. So I'm just wondering if you could talk about potential future just opportunities around where you can go with gas given your diverse portfolio.

Yeah, absolutely. So You know, as we sit here today, we're a very large gas producer at a B and a half a day. And the good news is we're seeing high prices across all our products, gas, NGL and oil. In 2022, our allocation between the assets is not changing. So we're maintaining production year over year in each of the products. But we do have, to your point, a huge inventory of very high return gas, and we think that's going to be very valuable in the future. We're quite encouraged by the long-term gas fundamentals. It's a bit early to set any expectations for 2023, but, you know, really when we set that allocation, we'll be optimizing for what program maximizes our cash flow and our free cash flow generation. So, you know, it's great to have that gas option within the portfolio.

No, it's interesting to see. Thank you. Thank you.

Your next question comes from Doug Legate with Bank of America.

Please go ahead.

Thanks. Good morning, everyone. Thanks for taking my questions. Morning, Doug. So, guys, I wonder if I could start with the sustaining capital question. Obviously, the inflation, I think you've probably been more how can I say, realistic or at least candid about what you're seeing in your numbers going forward. But I guess to pick up on the earlier question, should we think of this as a new level of sustaining capital, or would you expect some relief as you, or for that matter, some other additional changes as you look into 2023? And I guess my follow-up is related. Your exit rate in the second half of the year, the range suggests you're going to be in the 190s, it looks like. What does that look like going into 2023? Does that roll over again back into your 180, 185 range, or does it maintain at that kind of level? I'm just trying to understand what's in the plan. I'll leave it there. Thanks.

Yeah. Thanks, Doug. Appreciate the question. First on the sustaining capital, I think Really what we're seeing is, of course, it's going to depend a little bit on the commodity price environment and the activity level that we're seeing in 2023 and beyond as to set that sustaining capital. I think if prices stay where they are today, you know, our 2022 capital guide is a good jumping off point for that sustaining capital in 23. And obviously, if prices pull back into the mid cycle range, then we would fully expect the sustaining capital would pull back down to that one and a half billion level. So I think that's how we're thinking about it, Doug. And I think that's, you know, a good place to jump off of for 2023. You know, on your question around production trajectory and into next year, You know, I think really what we'd think about is if we wanted to be in maintenance mode again in 2023, we'd look to be flat year over year on production. So not necessarily hang on to that high exit rate, but really what we do is think about what the best capital allocation and return option is once we get there.

Okay. I appreciate the answers, guys. Thank you.

Yeah, thank you.

Your next question comes from Janine Wei with Barclays. Please go ahead.

Hi, good morning, everyone. Thanks for taking our questions. Our first question is on cash returns, one of our favorite subjects. You're increasing to the 50% payout in October, which is great, and at least on our numbers, there's definitely upside from there if you choose. You're already calling the 24 notes early. Your next maturity isn't until 26, and you're building a lot of cash in the meantime. So can you just discuss the parameters for how you decide on what the appropriate percent payout is every quarter?

Yeah, Janine. Yeah, thanks for the question. I think, you know, we like your perspective because you're stacking upsides on top of upsides. I mean, if you look at the trajectory overall, we're set to double that cash return from 25 to 50. But really, if you think about it, in the first quarter we returned $123 million, and that's going to kind of quadruple or quintuple as we look out into the fourth quarter. So actually the rate of change on cash return is really high, probably accelerating as fast as anybody into a yield that would be leading in the peer group and obviously leading across the broader market. So we like that trajectory. I think on the sort of process for deciding, you know, where to land out on that cash return. What we've steered the market to today is we're going to start at the 50. You know, Corey mentioned this in his prepared remarks. We do want to see debt come down below the $3 billion. But, you know, obviously we have the opportunity and the flexibility within the framework to go higher than that 50 with time. But we're not making that commitment today.

Okay, great. Thank you. Our second question is maybe we can hit on scale a little bit. The 25% of the 22 capex increase that's due to maintaining the high-spec rigs and the preferred frack crews, eliminating the white space in the program, essentially. Oventive clearly has scale from an overall company perspective, but what you see in the current operating environment, does that make you rethink or just think differently about scale in each of your basins? Thank you.

Yeah, thanks, Janine. No, I think, you know, and we've talked about this before, I think there is a minimum level of scale to be able to do what we do, but a lot of it is what I kind of call sophistication. So once you've hit that minimum level of scale where you can be in, you know, large pad developments, drill long laterals, and simulfrac, and use wet sand, those types of real key differentiators that we're able to do that a number of our peers aren't able to do. Once you've hit that level of scale, it really comes down to a sophistication piece. That's why you hear us talk a lot about focusing on this culture of innovation to be able to constantly drive new and creative ways to either lower costs or add to the type curves that we're producing. So I think we're comfortable with the scale that we've got both as a company and across each of the basins.

Your next question comes from Nitin Kumar with Wells Fargo. Please go ahead.

Hi, good morning, and thanks for taking our questions. I want to pick up on a thread that Neil was talking about. You have a lot of optionality within your portfolio around commodity. Could you talk a little bit about whether there are opportunities for OVINTIV to participate in the U.S. LNG market, given the 100% transportation to the Gulf Coast? And maybe some thoughts around the Canadian LNG market. We're seeing a lot of strength in LNG prices, and I want to see if you can participate.

Yeah, no, appreciate the question. And this is a space that we're doing a lot of work in today. Our strategy for a long time with our gas production has been to get price diversification. And you can see that today with over 80% of our Permian gas priced outside of Waha and about 50% of our Canadian gas priced outside of ACO. And so today we are considering options for getting that pricing exposure to LNG as part of that strategy. You know, I would tell you probably the one thing that we would rule out would be an equity interest in an LNG project, but certainly looking at some of the evolving commercial opportunities. And to your point, 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.

Great. Great. I appreciate the answer. And I guess maybe just to touch on cash returns as well, I assume at current levels, the buyback is probably the focus, but I did notice in your slides, you talked about a variable dividend. Could you talk about the thought process around how the cash return might evolve in terms of the balance between buybacks and variable dividends?

Yeah, absolutely. So You know, we believe, like all capital allocation decisions, it has to be driven by returns and value. And so the board looks at this every quarter. And really, we're still using the same four criteria that we talked about from the outset. So we want to look at how the equity is trading today versus our view of intrinsic at mid-cycle pricing. We take a look at relative valuation. We study what our free cash flow yield is implying. And then finally, we look at the macro to see where we're trading relative to mid-cycle on just commodity prices. And so today, we obviously have very high commodity prices, but we still see our equity valuation as well below intrinsic at mid-cycle. And so today, we continue to see the best way to return cash is with a combination of our base dividend and buybacks. But again, under the allocation framework, we'll make the most value accretive decision as we go quarter by quarter.

And we think that flexibility is valuable over time.

Your next question comes from Arun Jaram with JPMorgan. Please go ahead.

Hey, good morning, Brendan. I wanted to talk a little bit about the full year CapEx number. Your updated guide calls for about a billion dollars, a little less than that, of CapEx in the first half, or roughly a $500 million per quarter run rate. And you downshift to $375 per quarter in the second half. I know you're running a more level-loaded program with four frat crews, so just trying to understand the CapEx trajectory in the second half. It sounds like working interest is maybe a driver, but help us get comfortable with that second half. downshift in capex?

Yeah, so the activity level on a gross basis is essentially unchanged through the year. And really, it's just that working interest effect. And the largest driver of that is the lower activity in the BC side of the montany in the front half of the year. And we're now receiving permits for that BC Montney area. And so we're well positioned to be back into that area in the second half of the year, which we had signaled the last call. So that's now happening and moving ahead. So that's really the factor that's driving that.

Great, great. And just maybe a follow-up on the the OFS contracting kind of strategy. Last quarter you'd messaged that you'd locked in, Brendan, 100% of your FRAC and you'd contracted your OCTG supply and some of your service capacity for DNC. Have you shifted any of the contracting in terms of pricing and You know, before, it sounds like you're contracted on the FRAC side, but maybe not so on steel and other services. But maybe give us an update on how that contracting strategy is evolving, given this tight services environment.

yeah you know you've got it nailed there so we had priced in a lot of our um dnc activity particularly on the frac side and a portion of our pipe for the year we had secured all of our pipe for the year but but some of it we had left unpriced um and octg if you remember back in february was actually trending down and of course the events that have unfolded since then have have flipped that over so You know, we're certainly glad we locked in as much as we did on pricing. However, you know, clearly that still leaves some exposure to increased prices on the fuel and labor and steel side. And that's what we've reflected in the updated guide. So, you know, we are continuing to lock in prices through the year to make sure we've got the certainty we need. And that's really what you see reflected in the updated capital today.

Your next question comes from Mano Holschroff with TD. Please go ahead.

Good morning, everyone. I just have one question on hedging. You're one of a fairly short list of companies that have put on new oil hedges for the first half of 2023. And if we look across the industry, we've actually seen a few companies suspend their hedging programs entirely. My question is, what can we expect the hedging strategy to look like beyond the middle of next year? And why hedge at all with the balance sheet back in good shape and potentially no growth into 2023?

Yeah, Mano, thanks for the question. And this is a key piece for us because we've significantly adjusted the hedging practice going forward as of the latest announcement. And so, Really, our strategy here is we want to be able to protect the business from an environment of very low prices, which unfortunately is still a real possibility over time in the commodity business that we're in. And so really what we're doing is we're making sure that in a period of low prices, we can maintain scale in the business and be free cash flow neutral or better after the base dividend. And we think that's a prudent approach to managing risk with our hedge book. And so what that's translating through is a hedge book that's something like 20% to 25% of production and today using three ways that give us a lot of upside price exposure. And so to your question about why hedge at all, we like the trade of having that protection in place in the event that something happens, but also making sure that we've got quite a lot of upside. So, for example, if you look at the position for Q1 and Q2 of next year, oil participation up over $110 a barrel and gas up over $7 an M. So we think that's a good trade-off in terms of managing that commodity price risk.

Your next question comes from Jeffrey Lane John with Tudor Pickering Holt. Please go ahead.

Good morning, and thanks for taking my questions. My first one is just a follow-up or a few follow-ups to the discussion on returns and free cash flow allocation overall. You know, it looks to us that just given your debt maturity window and how you'll be able to drop to sub 3 billion in debt by the end of Q3 that you can easily continue to strengthen the balance sheet towards the 2 billion level by the end of next year at Strip if you wanted to, even while still returning in excess of 2.5 billion of cash to shareholders on our numbers. So I guess first, is that a reasonable way to think about what 2023 could look like at Strip? And then second, does somewhere near that $2 billion level in debt make sense, just looking at leverage metrics under mid-cycle pricing? And then lastly, once you get there, absent M&A, can we see the vast majority of free cash move towards shareholder returns?

Yeah, Jeff, appreciate the numbers there. Yeah, I mean, absolutely, directionally, you've got it nailed. I think the way I characterized it was well over $2 billion of leverage. Shareholder cash return next year on today's prices. So so I think that was consistent with your two and a half number So, you know really on the on the where we headed on the debt We believe that continuing to reduce debt is is important to create resilience and we think that's going to have a lot of value going forward So maybe I'll just ask Corey to comment on that trajectory. I

Yeah, Brendan, I think when we look at the overall capital structure, it's important too to remember when you're this far above mid-cycle prices, putting some away and improving that credit rating is important. So right now we sit at what we call low BBB. Ideally, we'd be in a mid BBB space, which you can debate whether that's $2 billion or a little bit less than that. But somewhere in that direction probably gets us closer to mid BBB as an ideal capital structure.

And then, Jeff, maybe the last thing I think was your question on where does the percent of free cash flow trend to with time? And I think what you see across the sector here is that as companies have reduced their debt down to an optimal level, that that cash return starts to inflect upwards. And so I think that's a pattern that makes sense for us as well.

Perfect. Thanks. And then, My second one is just on portfolio rationalization. I just wanted an update on how you view the opportunity at this point to sell down assets like the Uinta and how you think about utilizing proceeds for any divestments if they'd be utilized towards bolt-ons, if you can talk about how you'd approach those opportunities, if at all, or if they could be earmarked to further accelerate the buyback program.

Yeah, maybe just I'll start with the bolt-on piece and then come to your question on the A&D market overall. I think we just think it's good business to just be continuously looking in the market for value-accretive bolt-on opportunities. And you can see us making quite a bit of progress, even though it is a more challenging environment from a bid-ask spread in today's market. So we're committed to staying disciplined on this. We evaluate the deals through our mid-cycle lens and You know, we're comfortable today with our over 10 years of premium inventory, but we like the ability to be just adding to that and extending that as we go. You know, just on progress there, we've added something like 140 net locations since we started towards the end of last year for very low amount of capital. And by the way, about half of those is in the Permian. So we kind of like the progress that we're making, chipping away there. I think on your broader A&D question, clearly this is a seller's market. Prices are very strong and expectations are high from sellers. So we look at the whole portfolio all the time to try and figure out what's the best way to get more value out of it and how do we translate that through to shareholder value. So nothing specific to point to there, but something we're always scanning for.

Your next question comes from Nicholas Pope with Seaport Research. Please go ahead.

Good morning, everyone.

Good morning. I was hoping you guys could talk a little bit about the market optimization piece and kind of where that flows through for the company. It looks like you guys had a really strong kind of realized pricing number for the quarter. And obviously it's a big charge. You guys have a big marketing organization. So just kind of Maybe you could talk through a little bit about where the benefit of that kind of shows up elsewhere on kind of the income statement realized pricing, or is it more just seasonality, why the pricing was so strong for the quarter?

Yeah, I'll just ask Corey to take that one on, Nick. Thanks.

Hey, Nick. Yeah, as far as the market optimization segment, that's got a few different pieces in there. So if there's any – Commitments that we have our obligations that don't relate to operating assets things like our Rex contract kind of roll through there as well as that's where the buying and selling and around different sales points show up so when the marketing team optimizes the revenue by Buying and selling within you know basins. That's kind of where it shows up so margin enhancement will appear there as well as some of our legacy costs which we've talked about in things like RACs rolling off May 2024. So a combination of those two show up in that segment.

Got it. That's helpful. And just switching gears a little bit, when you look at the Anadarko asset right now, it seems like the first quarter was a little weak. And try and understand, you know, you kind of talked about weather and kind of operational delays. I was curious how much of that kind of was in the Anadarko and, you know, I guess what the longer-term goal is right now with that asset kind of going forward?

Yeah, thanks, Nick. Yeah, really in the Anadarko, the story there is the 60-40 piece that we talked about overall in the portfolio where 60% of our turn-in lines are going to come in the second half of the year. So you're going to see Some of that show up there and strengthen production through the back half of the year. But really across the portfolio, we're broadly flat. year over year in each of the assets. There's a little bit of shape in the Bakken and the Montigny because of deferring some of that first half 2022 activity in the BC side of the Montigny and putting that into the Bakken. But outside of that, in this maintenance mode, we're largely maintaining scale in each of the assets.

There are no further questions at this time. Please proceed.

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