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. Its operations also include the marketing of natural gas, oil and NGLs. It operates through three segments: Canadian Operations, USA Operations and Market optimization.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Sequentially degrading gross margin and EBITDA margin: The company is witnessing a lower gross margin and EBITDA margin, which was falling continuously on sequential basis. Its gross margin fell to 43.6% in Q2 2021 v/s 65.5% in Q4 2020, while the EBITDA margin stood at 12.7% v/s 34.6% in the same period.

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 1.46x, higher than the industry median of 0.71x. Additionally, its % LT Debt to Total Capital stood at 50.0% against the industry median of 29.7%. These factors imply higher balance sheet risks.
• Trading close to the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The firm reported strong performance in Q2 2021, with free cash flow of USD 350.0 million, thanks to increased output. However, its gross margin and EBITDA margin have been declining sequentially, and it has also failed to keep up with the industry, resulting in poorer performance throughout the operating margin matrix, indicating that the firm is under pressure. Furthermore, the resurgence of Delta variant instances is creating a lot of uncertainty, which might have an impact on the company's operations and cash flows if the government enforces certain mandatory lockdowns to combat the spread. The company is heavily leveraged, implying balance sheet concerns. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 38.94 on September 23, 2021.

ARC Resource Ltd

ARC Resources Ltd (TSX: ARX) is an independent energy company engaged in the acquisition, exploration, development, and production of conventional oil and natural gas in Western Canada. The company produces light, medium, and heavy crude, condensate, natural gas liquids, and natural gas.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread.
• Weak liquidity profile: In Q2 2021, the company's current ratio was 0.38x compared to the industry median of 0.99x. While its Quick ratio was also on the lower side at 0.38x V/s 0.82x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Leveraged balance sheet: The company recorded higher long-term debt on June 30, 2021, at CAD 1,882.4 million, which increased from CAD 555.2 million on Dec 31, 2020.
• Exhausting technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock has touched its previous resistance level and the momentum oscillator RSI (14-Period) is trading at ~76.17 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

Despite strong production and good sales in Q2 2021, the firm reported a net loss in its financial statements due to greater operational expenditures than revenue, implying that the company is under pressure. Furthermore, the company's long-term debt grew to CAD 1,882.4 million on June 30, 2021, up from CAD 555.2 million, implying increasing balance sheet concerns. Furthermore, the resurgence of Delta variant instances is creating a lot of uncertainty, which might have an impact on the company's operations and cash flows if the government enforces certain mandatory lockdowns to combat the spread. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 10.87 on September 23, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.