Ovintiv Inc. (TSX: OVV) is a leading North American-based company which is engaged in the exploration and production activity of crude oil and natural gas-based in North America.

Due to a tepid macro outlook coupled with uncertain economic activities, the Board of Directors has suspended its previously issued 2020 guidance.

Q1FY20 Financial Highlights: Ovintiv Inc. reported a stellar quarterly number and reported total revenues of USD 2,643 million, as compared to USD 1,235 million, underpinned by gains on risk management, net amounting to USD 1,055 million against a loss of USD 355 million in pcp. Operating Income stood at USD 759 million, as compared to a loss of USD 227 million a year ago. The quarter was marked by a higher transportation and processing costs and a subsequent rise in depreciation, depletion and amortization, impairments, and purchased product expenses. However, there was a fall in the upstream transportation and processing by USD 0.50 per BOE primarily attributable to the higher proportion of total production volumes from the USA. The Company reported a net profit of USD 421 million, as compared to a loss of USD 245 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: The group’s topline is correlated to the oil prices. Any fluctuation in oil prices is likely to affect the group’s performance. Also, any further outbreak of the novel virus would jolt the oil demand, which in turn would impact the group’s performance. 

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of OVV corrected ~56% so far this year, due to a stiff correction in the crude oil prices followed by the shutdown of manufacturing and industrial activities across the major part of the Globe. In the recent past, the group focused on market diversification through the derivative financial instruments and physical transportation contracts, which has resulted in improved performance. The Company seek to generate healthy cash flow, despite a fall in international crude oil prices. The Company took a prudent step and reduced its Capital expenditure by USD 300 million in order to preserve the liquidity. The oil price has witnessed a relief rally in the recent past as the demand is ticking up gradually. We expect the demand for oil and its derivative to improve in the near term as most of the economies are opening up and easing the restrictions. Consequently, industrial and manufacturing activities are resuming. Improving demand scenario is likely to provide relief to oil prices which is likely to improve the group’s performance. We have valued the stock using Price to Cash Flow-based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Chesapeake Energy Corp (TSX: CHK), Crescent Point Energy Corp (TSX: CPG), Enerplus Corp (TSX: ERF) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 12.77 on June 25, 2020.

OVV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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