Ovintiv Inc.

Ovintiv Inc. (TSX: OVV) is a leading North American exploration and production (E&P) company focused on developing its high-quality, multi-basin portfolio. Ovintiv works to safely produce crude oil and natural gas-products that make modern life possible for all. 

Key Highlights:

• Three consecutive years of free cash flow generation: In the quarter under consideration, the company posted USD 47 million of non-GAAP free cash flow and reduced net debt by USD 217 million. The company reaffirmed that all excess cash flows would go toward debt reduction. Moreover, the year 2020 will be the third consecutive year in which the company has generated free cash flow. The company have returned USD 1.7 billion of cash to shareholders since 2018.
• Strong liquidity to support future operations: The company reported liquidity of USD 3.1 billion, which seems sufficient to withstand the current challenging operating environment. Nearly 80% of credit facilities are available till 2024, which is a key positive.                                      

Source: Company Presentations

• Improved operations: The company reported an improved production during the third quarter of FY20 at 186 Mbbls/day of crude and condensate, higher than the earlier guidance of 180 Mbbls/day, which is noteworthy. Moreover, the company reduced its net debt by USD 217 million from the previous quarter, which is impressive.

Source: Company Presentation

Q3FY20 Financial Highlights:

• OVV announced its quarterly results, wherein the company posted total revenue of USD 1,190 million, as compared to USD 1,871 million in Q3FY19. The decline was primarily attributed to lower product revenue and losses on risk management.
• Total Operating Expenses stood significantly higher at USD 2,696 million, as compared to USD 1,556 million in the previous corresponding period (pcp), due to inclusion in impairments costs amounting to USD 1,336 million.
• The company reported an operating loss of USD 1,506 million, as compared to an operating income of USD 315 million.
• OVV reported a net loss of USD 1,521 million, as compared to net earnings of USD 149 million.
• Cash and cash equivalent stood at USD 32 million, while total assets stood at USD 15,157 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company is exposed to volatility in the crude oil prices. A decline in oil prices would weigh on the group’s future performance.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation:

Total Costs for 9MFY20 stood at USD 11.77 per BOE, declined 7% over pcp. Moreover, the company is targeting a cost reduction of USD 200 million in FY20 and expects ~USD 300 million of cost savings in FY21. In the recent past, we have seen an improvement in the crude oil prices, aided by the gradual revival of the demand on the back of higher industrial activities. We expect the above trend to continue in the foreseeable future driven by improved demand dynamics. The stock bounced back from its lows and appreciated ~33% and ~44% in the last one-month and six months, respectively. The stock closed above the technical support of 50-days, 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit upside (in percentage terms). For the said purposes, we have considered peers like Crescent Point Energy Corp, Chesapeake Energy Corpetc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.36 on December 03, 2020.

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

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