Ovintiv, the Denver-based energy giant formerly known as Encana, has been on a relentless march towards efficiency and shareholder returns. Their 2024 plan, unveiled on their February earnings call, promises a staggering 40% increase in free cash flow, achieved with flat production and a lower commodity price assumption. But hidden within their meticulous presentation, a quiet revolution is brewing, one that could unleash Ovintiv's true growth potential: the rise of Canadian condensate.

For years, the Montney play, straddling the border of British Columbia and Alberta, has been primarily associated with natural gas production. However, Ovintiv has been strategically focusing its Montney capital on a specific window within the play: the condensate window. Condensate, a light hydrocarbon liquid that trades at a premium and generally prices in line with WTI, represents a potent profit engine for Ovintiv.

The company's emphasis on condensate is evident in their first quarter 2024 earnings call, where they highlight their condensate pricing, achieving 103% of NYMEX on an unhedged basis in Q1. This robust pricing power stems from Ovintiv's shrewd physical transportation arrangements, channeling their condensate to premium markets in Eastern Canada, Chicago, California, and the Pacific Northwest.

However, the real story lies not just in current pricing, but in the potential for future growth. Ovintiv has been hinting at the sheer scale of the Montney condensate resource, which, surprisingly, holds the second largest remaining oil reserves in North America, only surpassed by the mighty Permian. While Ovintiv currently maintains a flat production profile in the Montney, aligning with their company-wide maintenance strategy, they have repeatedly emphasized their capacity for modest growth in the play.

The condensate equation is further fueled by the expanding Canadian oil sands industry. As oil sands producers embark on ambitious brownfield projects and gain access to broader markets, their need for condensate, a crucial diluent for transporting heavy oil, surges. This heightened demand, coupled with the already existing domestic condensate shortage – Canada imports nearly 50% of its condensate needs – creates a compelling pricing environment that uniquely favors Ovintiv.

While Ovintiv's 2024 plan is laser-focused on Permian oil production, their commentary suggests that the Montney condensate window could be their secret weapon. They possess a potent combination of factors: a vast, underappreciated condensate resource, sophisticated transportation infrastructure, a market starved for condensate, and the proven operational excellence to efficiently deliver those barrels.

Hypothesis:

If Ovintiv were to shift their focus even slightly, reallocating capital from the Permian to the Montney condensate window, they could unlock significant production growth. Given their current Montney program of 60-70 wells with a capital allocation of $450 million, even a modest increase to 80-90 wells with a proportionate capital increase could yield a substantial volume increase. Assuming an average well productivity of 1000 bpd (based on their recent top 10 Montney well performance), this could translate into an additional 8,000-9,000 bpd of condensate production.

Potential Production Growth from Montney Condensate

Numbers:

Potential production increase 8,000 - 9,000 bpd of condensate Estimated capital increase $150 - $180 million (proportional to well increase) Condensate price Assuming a conservative 95% of WTI, with WTI at $80, this equates to $76 per barrel Additional revenue $221 - $259 million annually

This potential growth trajectory doesn't even factor in the anticipated upward pressure on condensate pricing due to the oil sands industry's expansion. Ovintiv, armed with their unique market position and operational prowess, has the potential to become a dominant force in Canadian condensate, a market poised for explosive growth in the coming years. While their current focus on Permian oil is prudent, their Montney condensate window might just be the key to unlocking their next chapter of growth and value creation.

"Fun Fact: Condensate is often referred to as "natural gasoline" due to its light composition and its ability to be used directly as a fuel or blended with gasoline."