Ovintiv Inc (OVV) Q3 2021 Earnings Call Transcript

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Ovintiv Inc (OVV -0.43%)
Q3 2021 Earnings Call
Nov 3, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Ovintiv's 2021 Third Quarter Results conference call. As a reminder, today's call is being recorded.

[Operator Instructions] I would now like to turn the conference call over to Jason Verhaest from Investor Relations. Please go ahead, Mr. Verhaest.

Jason Verhaest -- Investor Relations

Thank you, operator, and welcome, everyone, to our third quarter 2021 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 specific questions. Please limit your time to one question and one follow-up. This allows us to get through more of your questions today. I will now turn the call over to Brendan McCracken.

Brendan McCracken -- President

Good morning, and thanks, everyone, for joining us.

Following our brief prepared remarks, our team will be available to answer your questions. We're pleased to announce our third-quarter results. Our unique culture of innovation and discipline is driving value creation across our business. We're delivering on every aspect of our value proposition. We're in action on cash returns to shareholders. We are rapidly reducing debt. Our efficiency gains are fully offsetting inflation. We're generating superior returns on the capital we're investing and that's resulting in significant free cash flow, and we're using our expertise and innovation to drive efficiency gains and lower emissions. We're committed to delivering this value creation directly to our shareholders, as demonstrated by our rapid debt reduction, share buybacks, and our recently increased base dividend. We reduced net debt by over $400 million in the quarter to roughly $4.8 billion, and we remain on track to see debt below $4.5 billion by year-end. Our leverage currently sits at 1.5 times, which is less than half of what it was at the start of the year.

Based on our significant free cash flow of $480 million during the quarter, we are already in action on our new shareholder returns framework. This will see us return almost $150 million to our shareholders in the fourth quarter, through the combination of share buybacks and our base dividend. We continue to maintain capital discipline and our full-year 2021 capital program remains unchanged at $1.5 billion. Thanks to our team's ongoing efficiency gains, we have seen no erosion to our capital efficiency from inflation.

In a few moments, Greg will share how our team is continuing to relentlessly pursue operational efficiencies and technical innovations on costs and drive outperformance from the new wells we're drilling as well as from our base production. Performance remained strong across our assets and we continue to see the benefits of our multi-basin portfolio and multi-product commodity exposure. In early September, we announced our new capital allocation framework, with a focus on value creation for our shareholders. Our business is capable of generating substantial free cash flow, and over the next 10 years, we project about $15 billion of free cash flow at $55 WTI, and about $21 billion at $65 WTI. With this robust outlook, we felt it was important to provide the market with a clear, transparent, and durable roadmap for how we plan to allocate that capital.

We've had the opportunity to meet with many of our shareholders since announcing the framework and the feedback we've received has been positive on our plan. First of all, we remain committed to running our business with lower debt. Not only does it drive costs out of the system, it also improves our resiliency during periods of market volatility. With that in mind, we set a new debt target of $3 billion, which at mid-cycle prices, would equate to a leverage ratio of about 1 times net debt to EBITDA. The $3 billion does not represent a stopping [Phonetic] point and our capital allocation framework gives us the ability to continue to further reduce debt and take our leverage even lower. While debt reduction remains a top priority, we've made tremendous progress, and we're now in a position where it doesn't need to be our only priority.

So, starting last month and until we reach $3 billion of net debt, we've committed to return 25% of the previous quarter's free cash flow after base dividends to our shareholders through either share buybacks or variable dividends. When we consider the total dollars involved, at the 25% level, this level of cash returns is very competitive with our peers. The remaining 75% will be allocated to the balance sheet with a modest amount allocated to small low-cost property bolt-ons. Once we hit our net debt target which at today's prices could be as soon as year-end 2022, we plan to increase the shareholder return allocation to at least 50%. Our plan is underpinned by a reinvestment ratio of no more than 75% of cash flow, and in 2021, we'll reinvest less than 50%. We've outlined the principles we use to make a value-based decision each quarter, on which cash return option to use, either buybacks or variable dividends, based on the market conditions at the time. We currently view share buybacks as the best way to generate excess returns for our shareholders and we're actively repurchasing shares in the open market. We'll continue to evaluate the value proposition of each option on an ongoing basis.

I'll now turn the call over to Corey.

Corey Code -- Executive Vice President and Chief Financial Officer

Thanks, Brendan. The details of our capital allocation framework for the fourth quarter can be seen on the Slide 4. We purposely built the framework to be clear, transparent, and durable. We'll return almost $150 million to shareholders this quarter alone, $111 million of this will come through share buybacks, and another $37 million through our base dividend, which we increased by 50% earlier this year. At almost $150 million, our planned fourth quarter direct returns to shareholders will be approximately 6 times the level of cash returns we delivered in each of the first two quarters of the year by the base dividend payments.

We've been active in the market and last month we repurchased 791,000 shares at an average price of $37.91 for about $30 million. We expect to complete the remaining $81 million of share buybacks over the remainder of the quarter. As we look ahead to next year and see the significant free cash flow potential of our business, the magnitude of cash returns to our shareholders is compelling. On Slide 5, we've provided an outline of our potential 2022 shareholder returns across the commodity price landscape. At the $80 WTI and $4 NYMEX prices, we see cash returns of about 13% of our equity value. On top of that, we would be reducing debt all the way down to the new $3 billion debt target, and potentially beyond.

At this time, we're using buybacks to return additional capital to our shareholders beyond the base dividend. While our share price has increased recently, we still see our intrinsic equity value, relative value, and other key metrics like free cash flow yield strongly signaling value accretion through buybacks. We'll continue to evaluate this return of cash amount then to make the best value-based decision for our shareholders. This corporate-level capital allocation framework is underpinned by the great work Greg and his team are doing on the operation side of the business. Strong production rates and cost control are keeping capital efficiency intact. This in turn is driving strong free cash flow generation and our ability to return more cash to shareholders.

I'll turn it over to Greg for operational highlights.

Greg Givens -- Executive Vice President and Chief Operating Officer

Thanks, Corey. Q3 marks another quarter of exceptional performance from our operational teams. We continue to demonstrate our ability to fully offset inflationary pressures and deliver lower drilling and completion costs across all assets. Through the first three quarters, 2021 well costs were 11% lower than 2020. As you recall, we set well cost guidance for our core assets earlier in the year, and have successfully met or beat those targets across the portfolio. In addition, we now have a clear line of sight to achieving these well costs through the full year, reaffirming our $1.5 billion capital budget. These remarkable achievements are a testament to our unique culture of innovation. This culture has produced a 2021 capital program efficiency that is top tier among our peers. I encourage you to compare our well cost against others, in of the basins we operate in.

We've been an industry leader in piloting and adopting new technology and processes to increase efficiencies and reduce costs across our assets. We are now in our third year of using Simul-frac and have made it a standard part of our operations. We were a first mover in the use of local wet sand in the Anadarko, in 2019, and recently, spread this application to the Permian Basin. We've been quick to progress new ideas and make them standard practice across the business. Our teams are continuously testing new technologies to find the next lever of innovation.

Our ability to consistently generate industry-leading well cost is directly underpinned by our continued operational excellence. This has never been more apparent than in the third quarter. Starting with the Permian, we achieved a new record performance on a 13-well development in Midland County. These wells had an average lateral length of 13,500 feet, drilled at over 2,000 feet per day, and completed over 3,300 feet per day using Simul-frac technology. In fact, 95% of our third quarter Permian completions utilized Simul-frac. We've also taken significant strides to quickly ramp up utilization of our Howard County sand mine. Nearly 50% of the proppant pumped in the Permian, during the quarter, was locally sourced wet sand. This is a significant increase from 2020, and nearly twice the amount pumped last quarter. Using wet sand generates an estimated $100,000 in savings per well.

In the Anadarko, through optimized equipment design, increasing number of wells per pad, and efficiently reoccupying older locations, we've made significant progress in lowering facilities cost. Facilities in the Anadarko were now approximately $300,000 per well, which is 27% lower than the 2020 average.

In the Montney, the tangible strides we have made in operational efficiency are really paying off. Ovintiv not only drilled a company record lateral length of over 15,300 feet, but in the third quarter alone, drilled three of the top five longest laterals in the basin to date. Also, 90% of our completions in the quarter implemented a new optimized casing design that is generating savings of roughly $120,000 per well.

Lastly, we are quickly hitting our stride in the Bakken and are delivering impressive operational results. With optimized wellbore and completions designs, we completed an average of 2,700 feet per day in the basin, this year, 50% faster than the 2020 average. All of these examples really highlight the key drivers we are using today and continue to look to in the future to fully offset inflation and deliver lower cost. In addition to lower cost, our program capital efficiency this year has been supported by well productivity outperformance across the portfolio.

In STACK, the team continues to optimize completion designs, which have led to significantly improved oil productivity. In the Montney, we have delivered industry-leading well results across a range of product windows. This includes the eight-well Pipestone 16 of 27 pad that has produced an average of 993 BOE per day, per well, over the first 180 days of production, with 63% of this production being high-value condensate. Our cube development approach in the Permian is delivering consistent year-over-year performance, while continuing to co-develop multiple horizons, test new zones, and optimize the value of our acreage.

Lastly, in the Bakken, we are seeing continued strong deliverability from our Kestrel pad and are encouraged by the early time performance of our recent reoccupied development. Ovintiv is truly delivering industry-leading results across every discipline and throughout our entire portfolio. These results continue to improve and our culture of innovation will allow us to further optimize our program and deliver additional operational efficiencies as we head into 2022.

With that, I'll turn the call back to Brendan.

Brendan McCracken -- President

Thanks, Greg. As we look ahead to 2022, Ovintiv's leading capital efficiency remains a differentiator among our peers. We fully offset inflationary pressures this year and we expect to hold our capital efficiency flat into next year. Our cost reductions are the result of innovation and execution. These changes in our designs and processes make the savings permanent. And our culture is unique and feeds constant innovation, and this is not easily replicated. We also entered the year with minimal DUC inventory and we'll enter 2022 the same way, so our capital efficiency is truly sustainable and is driven by the tremendous efforts across the organization to deliver better wells for lower cost.

We're optimizing multiple program levers as we refine our 2022 plans. These levers to name a few, include longer lateral development, maximizing our use of Simul-frac, and locally sourced wet sand, as well as delivering quicker cycle times through more efficient drilling and completion operations.

From base production optimization to supply chain management to drilling and completions efficiency, we're always looking at ways to deliver our production targets for the least amount of capital. And although, we're still working on our 2022 plans, we have a clear line of sight to remain -- maintaining a flat production profile for the same amount of capital investment. And we're highly confident we can deliver crude and condensate production of 180,000 to 190,000 barrels per day, with $1.5 billion of capital. We think capital efficiency will continue to be a differentiating factor in 2022 and we are positioned to be a leader among our peers.

Our capital efficiency is underpinned by a multi-basin portfolio that provides stability and optionality to our business, with equivalent returns on invested capital across the assets. Our portfolio provides operational and commodity diversification, cross basin learnings, and a decade-plus of inventory at our current development plans. [Phonetic] Each of our core three assets is set to generate over $1 billion of upstream operating free cash flow in 2021 at current prices. This strong performance across the board demonstrates the return on invested capital we're seeing in each play. The ability to shift capital quickly in response to regional pricing dynamics, weather outages, infrastructure access, or other challenges is a competitive advantage for our business. We can do this without sacrificing returns to ensure we deliver on our promise to corporate outcomes. This truly balanced multi-basin portfolio is unique in today's E&P landscape.

We've also made significant strides in emissions reductions over the last year and we're very proud to highlight our performance in this area. We recently declared full alignment with the World Bank Zero routine flaring initiative and we announced that we expect to achieve our target for a 33% reduction in methane emissions, four years ahead of schedule. Tracking our emissions allows us to set targets and identify solutions to reduce emissions intensity. We've monitored greenhouse gas emissions, for more than 15 years and have significantly decreased our emissions intensity during that time. Over the last year, we've enabled more proactive emissions management by establishing a digital emissions monitoring dashboard across our operations. And we currently have line of sight to greater than 20% reduction in our Scope one and Scope two, GHG intensity, by year-end '21, measured against our 2019 baseline. In 2022, we plan to further formalize our commitment to emissions reductions by setting a total GHG emissions intensity target which will be tied to compensation for all employees.

Innovating in pursuit of efficiency is what we do best, and that includes continuously improving our emissions performance. Before we turn the call over to Q&A, I'd like to leave you with the key reasons we are confident we'll deliver superior returns on the road ahead. We believe we're one of the very best at producing oil and gas from shale, and what we're particularly great at, is getting better at that all the time. We are intensely focused on making sure this capability translates into value for our shareholders. And we're committed to de-levering the company, returning significant cash to our shareholders. We've just begun to execute on our new shareholder return framework, which we believe will deliver a competitive cash return to our shareholders while continuing to rapidly reduce debt. We're committed to maintaining capital discipline and preserving our capital efficiency into '22. Our program is highly repeatable next year despite inflationary pressures. We're confident we'll keep our capital efficiency flat and deliver a production profile consistent with the second half of this year for $1.5 billion next year. Our multi-basin, multi-product optionality continues to be an asset and the competitiveness of our assets and the agility of our operations offer multiple pathways to deliver the best corporate outcomes and drive superior returns. And finally, we're committed to managing our business to deliver the products, the world needs in a manner that is both profitable and sustainable. This concludes our prepared remarks.

Operator, we're now prepared to take questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Doug Leggate with Bank of America. Please go ahead.

John Abbott -- Bank of America -- Analyst

Good morning. This is John Abbott on for Doug Leggate.

Brendan McCracken -- President

Good morning.

John Abbott -- Bank of America -- Analyst

So, Doug's part of another call [Technical Issues] at the moment. We have several questions. Our first question is on Slide 5 in your presentation. It looks like sustaining capital breakeven has dropped on that slide. Can you confirm at what level and what has possibly changed?

Brendan McCracken -- President

Hi. Just having a little bit of trouble hearing you, but I think your question was around the sustaining capital. Is that right?

John Abbott -- Bank of America -- Analyst

That is correct. I apologize. I am on a cellphone. Yeah. [Speech Overlap]

Brendan McCracken -- President

No, sorry. Doug. Yeah, Doug's first -- Doug's first question is on Slide 5. Correct?

John Abbott -- Bank of America -- Analyst

Yes.

Brendan McCracken -- President

Yeah. So, yeah, they [Phonetic] think this is a really key takeaway from the comments we've made here. I think we'll be one of the few companies that have provided some color on where we see '22 shaping up. And one of the things we're seeing as a real advantage for us is this ability to hold capital efficiency flat, year-over-year, which is giving us that profile you're talking about. So, this is something we've been working out for quite quite a while in terms of building the skill set. We've got a very sophisticated supply chain organization. We've got an operating organization that is constantly driving efficiency gains that allows us to offset inflationary pressures or improve the returns that we're generating on the capital investing. So key operating initiatives like Simul-frac, wet sand, new casing designs, and the record completion efficiencies we're generating are keeping that guide intact as we look out into '22, and generating the sustainable through the cycle savings.

So, maybe I'll just invite Greg to make a few comments on the details of how we're making that happen.

Greg Givens -- Executive Vice President and Chief Operating Officer

Yes, thanks, Brendan. Yeah, as Brendan noticed, we -- or mentioned, we are continuing to see some upward pressure on commodities, as we've talked about in previous calls; steel and diesel continue to rise. But, we're also really proud of the team's efforts to mitigate inflation on other commodities, such as sand. Our wet sand initiative has allowed us to actually hold those costs flat or reduce overtime, as well as how we're managing water, which has reduced those costs as well.

As we think about the service side, we're actively negotiating contracts for 2022. And while we are being asked for increases in some categories, we're receiving bids in line with 2021 cost and some other categories. Notably, on our recent frac RFP, we've had some folks come in with some really strong pricing that allow us to hold our cost flat there. But as we work with all of our vendors, we're looking way -- for ways for both sides to become more efficient and keep our costs down. And that's how we really believe we're going to be able to maintain that capital efficiency going forward. As Brendan noted, we've got a really sophisticated supply chain and that's allowing us to not only maintain the savings we've achieved in the past, but to hold those into the future.

So, really just in summary, we've been able to offset inflation in 2021 with this approach and we're confident we can manage inflation again in 2022, with not only offsetting the inflation but improving the efficiency of our programs overall.

John Abbott -- Bank of America -- Analyst

We appreciate that color. And then for our second question is on cash. The evolution of cash tax as you generate free cash flow over a multi-year period of time, how do you see that evolving and how do you factor that into your breakeven -- or a long-term [Phonetic] breakeven?

Corey Code -- Executive Vice President and Chief Financial Officer

Hey, John, it's Corey Code here. So, as we model out the business, obviously the higher prices make a big difference in terms of your cash tax horizon, but we're starting off with $4.8 billion in NOLs in the US, and another $1.3 billion in Canada. So, we're close to $6 billion of NOLs, to start with, and we don't see ourselves paying material cash tax still four years or five years out.

Operator

Your next question comes from Umang Choudhary with Goldman Sachs. Please go ahead.

Umang Choudhary -- Goldman Sachs -- Analyst

Hi. Good morning and thank you for taking my questions.

Brendan McCracken -- President

Yeah, good morning.

Umang Choudhary -- Goldman Sachs -- Analyst

My first question was on the outlook, can you give us any high-level thoughts around capital allocation across your asset portfolio, actually given the recent commodity strength, do you see potential to allocate a little more capital toward Anadarko Basin?

Brendan McCracken -- President

Yeah, no, I appreciate the question. The great environment that we find ourselves in here today as we're seeing very strong prices across all three commodities is that we have a big presence in, so that's driving returns in each of the assets. And so, today, what we would tell you is that something we'll look at as we're baking in the details of the 2022 plan. But it doesn't look like it's going to create a material shift in how we've been allocating capital. So, I would not expect a big shift in the product mix for us in 2022.

Umang Choudhary -- Goldman Sachs -- Analyst

Great. Thank you. And then, maybe more high-level thoughts around the macro and also any factors you're evaluating which can allow the company to pivot to some growth, thinking more longer-term, not 2022, 2023 and beyond? Once your debt level is down to sub $3 billion, what are the incremental uses of cash flow which you see? And I would guess growth is also a part of the consideration, then?

Brendan McCracken -- President

Yeah, I think on the macro, obviously there is a constructive setup there, but that's not really how we are forming our business plan and how we're running the company. We look at everything through a mid-cycle lens and look at our ability to generate returns on invested capital through that mid-cycle lens. We think on the go-forward, the business that we're building is a free cash-generating machine, and prices are going to go up and prices are going to go down, but we've got the ability to generate that free cash flow through the cycle and earn superior returns on the capital that we're deploying.

I think on your debt comment, the way we'd describe the $3 billion is it's not a stopping point, and really, one way to think about it is, it's a tipping point on our cash returns. So, with the capital allocation framework that we've outlined, that's the spot where those cash returns will increase to shareholders to at least 50% from the 25% that we're at today. So, that's really how we're thinking about that.

I think on your piece around growth, I think that's an option down the road for value creation. But once again, I'd bring it back to a focus on generating superior returns through the cycle. And so, we're very clear that while we're achieving our strategic priorities on debt reduction and increasing cash returns to shareholders, we're going to hold the business at scale. And I would add further to that, we don't really see a call for growth from our company today in the market, we've still got a lot of OPEC-plus spare capacity in the system, and we've got a world economy that's still getting back to pre-pandemic demand levels, so...

Operator

Your next question comes from Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning. And maybe just a pun [Phonetic], but a little bit on the last question, just -- you guys have a -- it is a great inventory base that Greg has gone over as well. My thought on just you did had a great Eagle Ford sale that helped sort of speed up in reaching your debt goals, and just thoughts of various other potential non-core sales to go along with your terrific organic free cash flow to get there?

Brendan McCracken -- President

Yeah, Neal. Yeah, good to hear you. Yeah. I appreciate the question. This is something we're going to always be looking at from a value proposition for the shareholders. And today, the portfolio we have is very much right-sized for the scale of the business. So, with the Eagle Ford divestiture, we weren't investing capital into that asset, and so, it was declining. And so, the cash flows were declining, costs were challenging to hold, and margins were challenging to hold. So, for us that made sense to bring that value forward and be able to accelerate debt reduction without it. [Phonetic]

I think, today, we think the portfolio we have is well suited to our strategy. Each asset is delivering competitive returns on the capital that we're investing there and is playing a key role in maintaining scale and maximizing the free cash flow generation that you're seeing.

Neal Dingmann -- Truist Securities -- Analyst

Great, great details, and then maybe just one follow-up for Greg.

Hey, Greg, you talked about the benefit of locally sourcing some of the wet sand. I'm just wondering could you talk about any potential for more fully integrating the process, or how you view it today? You guys have done a great job in sort of taking cost out where others have seen inflation, it seems like to me, and I'm just wondering, could you talk about, is there ways to even more fully integrate that process to -- to have even more cost savings, or maybe you could just talk about along those lines?

Greg Givens -- Executive Vice President and Chief Operating Officer

Sure, Neal. Thanks. Thanks for the question.

So, as we think about all of these innovative technologies and processes that we've been using over the last several years, they always get better over time. As I think about Simul-frac, when we started it in 2019, we were using [Phonetic] that on a small portion of our program, we quickly realized that it could have application across multiple basins, and within months, we were spreading that across the entire portfolio, and continue to get better with that technology, every time we go out on location. And now, Simul-frac is really part of everything we do, about 85% of our wells this year will be completed with Simul-frac.

When we talk about wet sand, the exciting thing about that is, it's got multiple benefits. We're taking a process that traditionally was you took sand from a mine at distance, you dried it, you put it on a railcar, you shifted it into the basin, and then you trucked it the last mile, the location, only to get it wet again and put it back downhole. And so, for us, it just made a lot of sense to take out all those steps. It not only takes out cost, but it actually has a really nice ESG impact. We're reducing the emissions from drawing the sand, reducing the emissions from all the transportation that comes along the way, and reducing the cost. Over time, we've gotten better at that process. Our mines in Oklahoma that we've used, were slightly further distance away from location, or as in Howard County, I was actually out there just a few weeks ago with the team. And you could almost see the location we were fracking from the sand mine. So, we're talking about just a few miles away, you're taking the sand and moving it over. And so, we're really getting better at that process. I think the improvements you're going to see over time is just around logistics getting more and more efficient.

When you're talking about, either Simul-frac or wet sand, both with the amount of volume we're able to pump in a day, that really requires a lot of synchronization between multiple teams within the company and externally. And our team just does an amazing job of maintaining those logistics and keeping ahead of the frac jobs. And so, I think you'll see us continue to get better and more and more efficient, fracking more and more feet per day. And there's also other technologies that we're trialing other ideas. The team's coming up with new ideas every day, and I think we're going to start integrating into our programs, and then moving that around the company just like we've been doing with Simul-frac and wet sand. The team is really good at collaborating and sharing ideas between multiple basins. So, whatever ideas we come up with, they quickly get spread across the organization.

So, we're not finished yet. We're just really getting started on showing how efficient we can be.

Brendan McCracken -- President

Neal, maybe I'd add one thing to Greg's comments there, which is an important outcome. You see us still setting pacesetter costs in each of the assets that are 15% to 20% lower than our average costs across the board. And so, that's telling us we still got a lot of running room on efficiency gains with things we know we can do already today. And so, that's quite encouraging for us and I think bodes well for the road ahead.

Operator

[Operator Instructions] Your next question comes from Noel Parks with Tuohy Brothers. Please go ahead.

Noel Parks -- Tuohy Brothers -- Analyst

Good morning.

Brendan McCracken -- President

Good morning.

Greg Givens -- Executive Vice President and Chief Operating Officer

Good morning.

Brendan McCracken -- President

Go ahead, Noel. Are you there, Noel?

Noel Parks -- Tuohy Brothers -- Analyst

Yes, hi. Can you hear me?

Brendan McCracken -- President

Yeah, we can hear you now.

Noel Parks -- Tuohy Brothers -- Analyst

Okay, sorry about that. You earlier were talking about your supply chain organization and also just now on the discussion about logistics. I'm just curious what you -- what they're seeing about where we might be in sort of overall supply chain challenges in the sort of COVID recovery cycle. I was wondering, if they thought maybe the worst of the challenges are behind them more or still might lie ahead?

Brendan McCracken -- President

Yeah, I'll maybe get Greg to provide a bit of color there on trajectory. But this is the environment where that team is really valuable. So, their ability to understand how the markets are working and the -- and anticipation and work through some of those supply chain bottlenecks that clearly are impacting the global economy as a whole has been a real advantage for us over not only this year, but I think going forward, so...I don't know, Greg, if you want to give some comments?

Greg Givens -- Executive Vice President and Chief Operating Officer

Yeah, for sure, Brendan. I mean, I think the first thing I would say is that our supply chain team has been at this for a while. This is something we've been doing for a decade now. We were one of the first operators to unbundle services. I think we have a better understanding of what it takes to not only perform operations on location, but all of the logistics that are required to get all of that equipment and material to location. So, we've been doing this for a number of years and the team just continues to get better and better. And I think that's why you've seen us not only apply some of these new technologies such as Simul-frac at a faster pace than our peers, but it is really fully infiltrated our programs just because of our ability to handle the logistics and the supply chain.

I mean as I think about what the pressures are going forward, I mean, we, of course, as we've said, we're seeing issues around steel and diesel. But those can be mitigated by simply using less. Labor is a challenge. Truck drivers are in demand in our basins. But again, if you get out ahead of that work, if you have a level-loaded program like we do, you allow -- that allows you to provide consistent work for these people and develop long-term relationships that are win-win. So, we are seeing the pressures. There are challenges out there, but our team has been doing this for a long time and we're up for those challenges. So, we feel really good about delivering on the $1.5 billion this year, and again next year, with her [Phonetic] level loaded programs, it will deliver that 185,000 barrels a day, is finishing this year and going into next. So, we feel real good about where we stand.

Noel Parks -- Tuohy Brothers -- Analyst

Great, thanks. And a question about infrastructure. You know, we're kind of in this environment now being lucky enough to perhaps look ahead and think about what would long-term $65 or $70 oil actually look like, or high gas prices as well. And as you look across the basin, I'm just wondering if you have any thoughts of -- or maybe you could sort of rank them where if we do see in this industry activity begin to ramp up, sort of at a steeper pace than it has so far, where do you feel like you have the most -- more [Phonetic] room and -- versus which areas do you think might be a bit more challenged, more quickly?

Brendan McCracken -- President

Yeah. Yeah, Noel, this is something that we've always had as part of our, sort of, basin evaluation criteria to be in places that are very well planned. [Phonetic] And so, we don't see an infrastructure challenge in any of the basins that we're operating in today, or for the near- to medium-term. And so, that's something that we were pretty deliberate about when we chose to get into each of these spots.

Operator

Your next question comes from Lloyd Byrne with UBS. Please go ahead.

Lloyd Byrne -- UBS -- Analyst

Hey, guys, Brendan. How are you, Corey?

First, I'd like to just touch on the bolt-ons and may have missed your commentary, I accessed on a little [Phonetic] late, but can you just talk a little bit about the types of deals you're looking at there? And then, the returns you're targeting in today's market?

Brendan McCracken -- President

Yeah, Lloyd, for sure. Yeah. Thanks for the question. The types of opportunities that we're looking at here are low-cost, small-scale accretive opportunities in the basins that we're already in. So these are things like leasing acreage nearby our existing positions, adding cash components to a number of the acreage swaps that we've done over the years, picking up acres to lengthen our laterals, increasing the working interest in wells that we're already drilling. So, those are the types of opportunities that we're looking at. We're seeing them across the portfolio. And you mentioned how we'll look at evaluating them. We're looking for full-cycle returns at mid-cycle prices, so not at today's prices. We're looking for strong full-cycle returns at mid-cycle where we can create value with our operating capability and our infrastructure footprint. I don't -- I can't -- I don't expect that these things are going to be ratable over time, but that's the approach that we're taking and it's built into our framework and we'll be very disciplined to that approach as we go.

And maybe, the other thing I'd say here is this complements the organic renewal element that's already built into our capital program. Remember, we have over 500 locations this year that we're assessing and appraising for becoming premium locations if we get more results and confidence in them, and that's built right into the $1.5 billion of capital that we're spending this year. So, we think, on the whole, this is just good business to both organically as well as through bolt-ons be evaluating through the cycle. And when we see accretive opportunities, we'll act, but it's not a target. We'll do it when we see the opportunity. We're not driven to it ratably.

Operator

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

Arun Jayaram -- JPMorgan -- Analyst

Hey, Brendan. How are you? First question I wanted to ask you was just on the potential inclusion in the S&P 400 Index. I know that the -- one of the strategies of the management team to read domesticated in the US was just to get more index flows. So, I wanted to see if you can give an update on that process because I think the S&P was the last index [Phonetic] that you're hoping to join at some point.

Brendan McCracken -- President

Yeah, Arun. Yeah, I'm great. Thanks for the question. I appreciate it. Corey will maybe just comment on where we stand there. It's really an earnings piece.

Corey Code -- Executive Vice President and Chief Financial Officer

Yeah. So, for those that aren't familiar, there is sort of two earnings test you have to meet. Obviously, you need to have positive earnings in a current quarter as well as be positive for the trailing 12 months. And so, if you look at where we're at today, the last sort of year-to-date, we're positive, I think it's 32. And then, obviously, we had a small loss this quarter with the hedge book. So, looking to Q4, even with any positive earnings, we'll meet both of those tests. And then, obviously, the actual inclusion is at the S&P discretion, which is obviously a little bit harder to predict. So, we think as soon as the end of the fourth quarter, we can meet all the tests that are required.

Arun Jayaram -- JPMorgan -- Analyst

Great. Great. Thanks for that, Corey. And just a follow-up. Brendan, we've been getting just a couple of questions on your thoughts around the Montney, obviously, since the BC Supreme Court ruling kind of mid-year on First Nation. So, I was wondering if you could just give investors a sense of how you're thinking about the Montney, obviously, you have a diversified portfolio, and just how does that potentially alter how you're thinking about allocating capital to the Montney?

Brendan McCracken -- President

Yeah. No. Maybe, maybe first off, just to say the Montney is performing incredibly well. You saw us highlight the free cash flow parity across the three assets. So, it's very much delivering strong returns on the capital we're investing there and performing well.

I think on the province in the Blueberry First Nation, we're watching that closely. But we're encouraged by the progress that's underway, and so, don't see that as a material effect today.

Operator

There are no further questions. Please proceed.

Jason Verhaest -- Investor Relations

Thank you, everyone, for joining us today, and for your continued interest in our company. The call is now complete.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Jason Verhaest -- Investor Relations

Brendan McCracken -- President

Corey Code -- Executive Vice President and Chief Financial Officer

Greg Givens -- Executive Vice President and Chief Operating Officer

John Abbott -- Bank of America -- Analyst

Umang Choudhary -- Goldman Sachs -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Noel Parks -- Tuohy Brothers -- Analyst

Lloyd Byrne -- UBS -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

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