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:

• Updated FY21 Guidance: The company has increased its FY21 production guidance of Crude & Condensate to 190 – 195 mbbls/day from the previous guidance of 190 mbbls/day. NGLs C2 – C4 production guidance has been increased to 80 - 85 mbbls/day, from ~80 mbbls/day. On the other hand, Natural Gas production is anticipated at 1,550 – 1,575 MMcf/d, higher than the previous guidance of ~ 1,550 MMcf/d. Meanwhile, the company’s FY21 capital expenditure is expected to remain unchanged at USD 1.5 billion.
  

• Higher Cash flows amidst economic jolt: Despite the ongoing economic cycle, the company reported a surge in its cash flows to USD 1,577 million in 6MFY21, higher than USD 683 million in pcp. The increase was due to rise in net income in the current period as compared to a net loss in pcp. Moreover, in Q2FY21, the company reported a non-GAAP free cash flow of USD 350 million, as compared to USD 52 million in pcp, which is noteworthy.
  

• Reduction in Debt: The company has reported a lower total debt in Q2FY21 of USD 5,314 million, as compared to USD 6,885 million in Q4FY20, reflecting a decline of 23%. A decrease in total debt is a key positive and indicates higher financial flexibility.

Q2FY20 Financial Highlights:

• OVV announced its quarterly results, wherein the company posted total revenue of USD 1,692 million, significantly higher than USD 726 million in Q2FY20. The increase was primarily driven by higher product and service revenues.
• Total Operating Expenses stood significantly lower at USD 1,813 million, as compared to USD 4,785 million in the previous corresponding period (pcp) due to inclusion in impairments costs amounting to USD 3,250 million in the previous corresponding period (pcp).
• The company reported an operating loss of USD 121 million, as compared to a loss of USD 4,059 million in pcp.
• OVV reported a net loss of USD 205 million, as compared to a net loss of USD 4,383 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: Volatility in the crude oil prices might dampen the overall realization of the company which would result in lower operational performance.

Stock Recommendation:

The company focused on achieving higher operational efficiency through prudent cost management, which is a key positive considering the current economic jolt. The company is focusing on allocating its capital investment program towards the Core Assets with an emphasis on improving yields from high margin liquids in order to optimize its cash flows. On the valuation front, the stock of OVV is trading at an EV to EBITDA multiple of 2.8x on NTM basis compared to the industry (Oil & Gas) average of 3.2x. Hence, considering the above rationale, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 32.13 on August 03, 2021 with a high single digit upside potential.

One-Year Technical Price Chart (as on August 03, 2021). Analysis by Kalkine Group

ARC Resources Ltd.

ARC Resources Ltd. (TSX: ARX) is a Canada based energy-producing company which is engaged in the acquisition, exploration, development, and production of conventional oil and natural gas.  The company produces light, medium, and heavy crude, condensate, NGLs, and natural gas.

Key Updates:

• Improved Metrics: The company reported consistent growth in recent quarters. Notably, Funds from operations, average daily production, and free funds flow surpass the previous quarters, which is encouraging.                                                         

• Ample Liquidity and prudent capital management: The company has ample liquidity of CAD 2.0 billion unsecured extendible revolving credit facility and CAD 1.9 billion of available liquidity, which seems to be sufficient to withstand the company’s short-term and long-term capital needs. Moreover, the company has prudent capital management and does not have a long-term notes repayment schedule before 2026.

Q2FY21 Financial Highlights:

• ARX announced its second quarter result, wherein the company posted Revenue from commodity sales at CAD 1,233.9 million, jumped from CAD 215.1 million in the previous corresponding period (pcp). The growth was primarily driven by higher income from Condensate, NGL, and Natural gas segments.
• Total expenses stood at CAD 925.1 million, surged from CAD 234.5 million in Q2FY20, due to higher commodities purchased from third parties, increase in Operating and Transportation costs, and a surge in Interest and financing expense.
• Net loss before income tax stood at CAD 198.0 million, as compared to a loss of CAD 88.9 million in pcp, due to an increase in costs as discussed earlier.
• The group reported a net loss of CAD 123 million, as compared to a net loss of CAD 43.5 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The business performance is directly correlated to the crude oil and natural gas prices and might foresee significant setbacks due to volatility in commodity prices.

Stock Recommendation:

The company reported a tremendous surge in cash flow and posted its cash from operations of CAD 737.3 million in H1FY21, significantly higher than CAD 280.5 million, a year ago. Moreover, the stock carries a dividend yield of ~2.9%, which looks impressive considering the current interest rate scenario. The management expects its FY21 Crude oil and condensate production to remain within the range of 64,000 - 70,500 bbl/day, while NGLs production is anticipated in between 40,000 - 42,000 bbl/day. Total FY21 production is expected in between 287,000 - 302,000 boe/day. On the valuation front, the stock is available at an EV to Sales multiples of 2.1x, as compared to the industry (Oil & Gas) median of 2.5x. Hence considering the above facts, we recommend a ‘Hold’ Rating on the stock at the closing price of CAD 9.14 on August 03, 2021 with high single digit upside potential.

One-Year Technical Price Chart (as on August 03, 2021). Analysis by Kalkine Group

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

Disclaimer

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