Ovintiv Inc (OVV) 2022 Q2 法說會逐字稿

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. (Operator Instructions) 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.

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 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 will be available to take your questions. Please limit your time to 1 question and 1 follow-up. I'll now turn the call over to our CEO, Brendan McCracken,.

Good morning. Thank you for joining us. Our second quarter results highlight our execution across the business, 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 strength, 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 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 7 of our peers and has 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 free cash -- 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 delivered this increase ahead of our original guidance due to tremendous balance sheet progress and strong underlying business performance. With this increased return profile will 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 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 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.

There's no doubt as shareholders we 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 5 months away from realizing the benefits of our refreshed hedging program. The roll-off of our 2022 hedges and rightsized 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 worth noting, our cash return offering is underpinned by our sustainable and growing base dividend. We kept our base 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 the 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 are taking a proactive approach to reducing our absolute debt and the interest costs that go with in. 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 and at the end of the quarter. Even after increasing cash returns to 50%, we still expect to reach our $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.

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 efficiency to that of 7 of our closest competitors. And whether you measure it on an oil and condensate production basis, we're using total production on either a 6:1 or 2:1 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 are 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're 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 are the categories that matter most. Our outstanding performance here is driving the strong capital efficiency 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, in-house logistics and on-site sand storage, we have been able to achieve top-tier completion efficiencies, completing over a mile of lateral feet and pumping over 16 million pounds of sand in a single day.

We are 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 are drilling our longest laterals ever, up 9% from last year. These new pacesetter results reinforce the continued efficiencies our teams are striving for and achieving every day. I'll now turn the call back over to Corey.

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 a realizable margin of 74%, up from 62% a year ago. This margin represents our realized prices -- price before hedges less our cash costs. Simply put, over the last 12 months, our average realized commodity price went up by about $30 a BOE, while our costs increased by less than $4 a 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, while our 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 at 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 firm transport contracts and increases our Montney natural gas price exposure outside of AECO to approximately 80% to 85%.

This diversification is derived 2 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 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 the realized price premium to more than offset the cost. I'll now turn the call back to Brendan.

Thanks, Corey. We're uniquely positioned as a multi-basin producer with significant scale in 3 premium North American players. 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 of 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 2 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 will include in a news release in early September.

Before we move 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 are pleased to accelerate the doubling of cash returns to shareholders by increasing our payout ratio to 50% of post-dividend free cash flow in July. As a result of that shift, we're delivering 1 of the highest cash return yield offerings compared to peers and the broader market. At 13%, our cash return yield has been increasing is poised to continue to increase this year and poised to more than double as we head into 2023.

We are resolute in our determination to close the valuation gap between us and our peers. We are 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.

(Operator Instructions) Your first question comes from Arun Jayaram with JPMorgan.

Brendan perhaps for you and Corey, I wanted to get your thoughts around 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. How do you think about balancing? You have the 50% minimal return to free cash flow. How do you balance that incremental cash returns beyond the 50% level versus doing more debt reduction or building cash on the balance sheet?

Yes. Thanks for the great question. maybe just take the first part first, on 2023, clearly, sitting here first week of August, it's early in the process. But our strategy for capital allocation in 2023 is 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 that, both at the high level of capital allocation but also allocation amongst the plays and products. But 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. We need to be convinced that any sort of modest growth would be clearly better on a risk-free cash flow and cash flow per share outcomes. And really, there's kind of 3 things that we're evaluating to look at that, Arun. One is, of course, just the market fundamentals. 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 outcompete 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 3 items, and we'll get more conviction with time.

On your second part there around how do we balance the allocation to buybacks versus debt reduction. Clearly, today, we're doing both at the 50% level. We want to see debt continue to come down. But we don't think net debt needs to be 0. And so you saw us double our shareholder returns earlier than guided. The cadence of cash returns 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.

Great. Corey, I wondered if you could give us -- or getting a lot of buy-side questions on the impact of the AMT on companies such as Ovintiv that have an advantage, a U.S. tax position, so I was wondering if you could maybe get your thoughts. I do know it's subject to a 3-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?

Yes. So you're right. And thanks for identifying that. It's kind of a key feature to the whole language is the way it's drafted. But if you -- it's a 3-year historical average to be above $1 billion, right? So if you think about 2023, that would be 2020, '21 and '22 would have to average $1 billion. And for us, as much as we don't want to remember 2020, that was when we had the pretty significant ceiling test impairments. So our net loss in that year was 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.

Obviously, going forward, 2024, that could be a calculation that we would be subject to and that would bring forward our tax horizon in the U.S. probably from a 2025 period, it might bring it forward 1 year. And you could kind of think about that as a prepayment of the '25 in '24 from that perspective.

Your next question comes from Neil Mehta with Goldman Sachs.

The first is just around regional gas bases. 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 talk about the way you're thinking about basis and managing that risk and how you see it playing out from here?

Yes. Thanks, Neil. 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 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. And so we're 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, it's 80% to 85% of our AECO gas -- or 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 we've got that transport fully secured and priced outside of a great deal that priced outside of the Permian.

That's helpful. And Brendan, could you talk about capital efficiency. It was a huge focus, obviously, in the first quarter, 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?

Yes, Neil, I appreciate it. I mean -- and there's really kind of 2 pieces that I think are important to highlight on capital here. One is, of course, the trajectory, which lots of investors 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 it's 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 are we at, well we're amongst the very best on capital efficiency. So the starting place is a great place as well. We're 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 have 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 a maintenance level capital for us is sitting here today, recognizing it's early, but it's looking like it's 10% to 20% higher than current capital when you look out to 2023.

Your next question comes from Jeanine Wai with Barclays.

Would 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. 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?

Yes. Thanks, Jeanine. I appreciate the question. Yes, I'll just turn it over to Corey there on how we're going to think about those absolute debt reductions.

Jeanine, it's Corey here. Obviously, the higher interest rates make these note takeouts much more attractive than they would have been 6 to 9 months ago, and we've even got debt that's trading below par once again. So for us, you look out at one of the benefits of higher prices means we've got excess free cash flow, and we can take out some of the debt either at 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 we'll balance the optionality on taking out the 26 is with trying to be opportunistic and buy out different parts of the curve, which will help us reduced interest expense, but we can do that at a relatively low cost and probably don't need to go into make whole, like a lot of those are trading kind of in the 105 range even for the higher interest rate notes.

Yes. And Jeanine, if you watch what we did with the 24 when we took those out, we took them out, I think, about 6 months early. So we didn't wait for the maturity there. We balanced the sort of interest remaining in 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.

Okay. Great. Lots of optionality there with the cash. Maybe just moving on to operations and the guidance. The 4Q guide calls for an increase quarter-over-quarter in oil, but it looks like NGLs and NAT 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?

Yes. It's really just the well mix across the assets and when they're coming on stream. So our third quarter turn in lines is our biggest quarter of the year by a decent margin. So as we march our way through the third quarter here, we'll see a number of wells coming on stream in the oilier plays. And so that's really what's driving that production shape. And then you've got a fairly consistent profile in the Montney 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.

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

Brendan, I wonder if I could pick up on your comments about inventory depth. You talked about more than 10 years of oil and more than 20 years of gas. And I guess I've got 2 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 really love your perspective on the Canadian gas market as you see Canada LNG move forward towards the middle of the decade. And then the related question is with the relative inventory depth that you have, how do you think about the sustaining capital that's always referred to oil as opposed to resetting the capital allocation towards growing gas.

Yes, Doug, appreciate the questions. Thanks for that. Really quick on gas macro views. Increasingly constructive, I think, would be the way we'd characterize our views here. 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 a need for a 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 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 then 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.

With respect to your question on capital allocation, I think the way to think about it is we've got great optionality there in 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. 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 million. So there's clearly room for us to do a little bit more in the Montney if we choose to.

Sorry, Brendan. Just to be clear, on the $1.7 billion to $1.8 billion, is it fair to assume that before considering inflationary effects, that number remains in place, but the swing within it -- is it right to think in fact go back more towards Montney perhaps.

That's right, Doug. And the $1.7 billion to $1.8 billion is really keeping us flat on BOEs, gas and oil. It's a fairly balanced approach today. So 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 just maintaining across the board.

Your next question comes from Neal Dingmann with Truist.

Brendan, my question is on strategy, just based on something you just said around Doug's question. You mentioned something on per share growth. I guess my question is, how do you view the best way to grow the business per share when you consider either production growth or obviously the unique shareholder return plan that you all have laid out?

Well, I think that's -- I think your question is how we think about it, Neal is really just laying those 2 alongside each other and looking at them on a risk basis over time. Because, of course, it's not an instantaneous effect. We're looking to deliver. It's a sustained effect we're looking to deliver. So that's really how we are thinking about the right capital allocation as we head into 2023 and just competing and comparing across those 2 choices. So clearly, where our valuation sits today makes the buyback pretty attractive.

Yes, I would agree. And then second question likely for Greg. Greg, just on (inaudible), you guys now have done a good job getting your hands around that. I'd like -- you put out Slide 7 others similar in the past, we show a lot of the innovation Simul-Frac and different things you all are doing. I'm just wondering, is that 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're thinking about sort of inflation into '23 and beyond that, again, if you are thinking inflation might go up. Do you have to do more contracting of rigs you have to try to lock in pipe? Or is there more of that now needed than there has been in the past?

Yes. I think, Neal, really -- and you might have missed it before, but I did signal a maintenance capital program sitting here knowing what we know today, recognizing it's August, our range that we've put on it is it's probably 10% to 20% up from the 2022 guide number. And really, that just reflects a number of the pricing agreements that we have in place today rolling over and having to reprice at market. So we don't know what that market will be. We've still got a few months to really kind of get that price discovery work done.

On your question around locking in services, I mean, long lead items, particularly steel. This is a place where we're already engaged 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 will only ever see us do that on a portion of the program. We're never going to lock in the whole program because that flexibility is valuable because we do live in a volatile commodity industry.

Your next question comes from Greg Pardy with RBC Capital Markets.

Thanks for the run-down. Brendan, you mentioned just the hedges rolling off earlier in the call. Could you just maybe remind us of what your hedging strategy is? And is the change -- is the pivot kind of a function of a market call or balance sheet improvement or both?

Yes, Greg, I really appreciate the question actually because that's an important piece for us. So late last year, we did change our hedging policy. And pretty substantially. So we move to what I kind of refer to as a pure risk management hedge approach. And really, it 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 3/4 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 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, 4 quarters out. So if you look at our disclosure today, you can see the first quarter, '23 in the second quarter '23 books are done, and we're partway through building the third quarter '23 book today.

And so the other aspect that I'll call attention to is we're using 3-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 an unforeseen commodity price drop.

Okay. Got it. And I know we've talked about cash taxes, but maybe Corey, we've talked before, you've mentioned before, no material cash taxes for kind of 5 years, has that overall picture changed with your spending and just given high prices?

Greg, yes, a little bit. I mean last time, I think we officially talked about it would have been in February. And so obviously, prices are dramatically higher today than they were at that point in time. But if you think about our business domestically in the U.S., we exited last year with about $5.3 billion in NOLs. And so even at today's prices, we think that cash tax horizon 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 a 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 cutoff 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.

Your next question comes from Gabe Daoud with Cowen.

Brendan just curious if you can maybe give us an update on thoughts around M&A and continuing to do some bolt-ons. I believe the previous figure you cited was a couple of hundred million bucks for bolt-ons taken out of free cash flow. Is that how we should still think about it?

Yes. Gabe, yes, 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 the sort of large M&A, we just continue to see that 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.

Great. Super clear. Maybe just a follow-up. Could you give us an update around permits in the Montney. Is there anything to highlight there?

Yes. Thanks, Gabe. Yes. So on the Montney side, on the Blueberry River First Nations permits issued, we remain encouraged there. The province and the Treaty 8 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 we sit here today, we've got all the permits for our 2022 program, and we're over 1/3 permitted on 2023. So 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 the Alberta side of the Montney or into other parts of the portfolio and generate the same corporate returns. So regardless of the outcome, we're in good shape here, but it is encouraging to see some progress there.

Next question comes from Menno Hulshof with TD Securities.

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 numbers. So maybe you can comment on where you think we stand in the innovation cycle and whether you're seeing those improvement curve 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?

Yes, Menno, great questions. the innovation innings game has been one we've talked with 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 that there's always another layer to unwrap and drive costs down.

And so we're 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 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 of your question is really around -- 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're 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.

That's helpful. Maybe I'll follow up with a question on electrification of your operations in fleet since there is a reference to it in your sustainability report. So how much of a priority is that? Where do you stand 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?

Electrification is a piece of our emissions reduction plan. We have a target to reduce GHG intensity by 50% we're 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 completion business. Now the D&C emissions are a smaller piece of the overall emissions pie for us. And so were 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 line. 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.

Your next question comes from Geoff Jay with Daniel Energy Partners.

Congratulations on being in the (inaudible) not having any CapEx increases for the quarter. I'm just kind of curious in terms of -- to kind of follow up on Neal's question earlier, how sort of locked in do you think you are for the year, kind of 80%, 90%? Or is there some rigor room? And then I guess, secondarily, was there any capital associated with the divested assets in the old figure or not?

Yes, Geoff, I appreciate the questions. Yes, I'll take the second 1 first. So no, there was essentially 0 capital in those divested assets, the Uinta and Bakken assets that we sold really, we're not attracting capital. They were high-cost mature assets that didn't have inventory associated with them. By the way, they had almost de minimis 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 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 D&C services. So it's a pretty high percentage for us.

At this time, we have completed the question-and-answer session, and we'll turn the call back to Mr. 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.

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.