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:

• Surge in Cash flows: The company reported solid growth in its cash flows at USD 1,577 million in H1FY21, as compared to USD 683 million in pcp. The growth was supported by higher net earnings of USD 104 million, as compared to a loss of USD 3,962 million in pcp.
• Ample liquidity to fund future operations: At the end of Q2FY21, the company reported an increase in liquidity, which stood at USD 4,403 million, higher than USD 2,972 million in pcp. The current liquidity level seems to be sufficient to meet the company’s upcoming working capital requirements and capital investments.
• Revival in operations: The company reported an increase in average liquid production during H1FY21 at 281.2 Mbbls/day, reflecting a 51% growth on y-o-y basis. Moreover, the company witnessed a surge in the realization rate, while WTI Oil & NGL prices were recorded at USD 61.96/bbl in H1FY21, jumped from USD 37.01/bbl in pcp. For FY21, the company expects oil and plant condensate production volumes in between 190.0 to 195.0 Mbbls/day and other NGLs production within 80.0 to 85.0 Mbbls/day. The corporation forecasts its natural gas production volumes in between 1,550 to 1,575 MMcf/day.

Q2FY21 Financial Highlights:

• OVV announced its quarterly results, wherein the company posted total revenue of USD 1,692 million, jumped from USD 726 million in the previous corresponding period (pcp). The increase was primarily driven by higher product and service revenues.
• Total Operating Expenses stood significantly lower at USD 1,813 million, against USD 4,785 million in the previous corresponding period (pcp). The improvement was primarily due to inclusion of impairments costs amounting to USD 3,250 million in the previous corresponding period (pcp).
• OVV posted an operating loss of USD 121 million, as compared to a loss of USD 4,059 million in pcp.
• The company 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: A fall in the crude oil prices might dampen the overall realization of the company resulting in lower operational performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is focusing on cost optimization and is expected to deliver USD 250 million of cost savings, supported by declining Legacy Costs, which would subsequently boost the company’s cash flows. On a longer timeframe from FY21 to FY25, the company is forecasted to report a cost savings of ~USD 1.8 billion, which is a key positive. Moreover, the company reported a reduction in net debt reduction, which is a encouraging. We have valued the stock using the price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Southwestern Energy Co, Enerplus Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 34.53 on September 01, 2021.

One-Year Technical Price Chart (as on September 01, 2021). Source: REFINITIV, 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 Highlights:

• Consistent Dividend Distribution: Over the years, the company reported consistent dividend payment backed by stable cash flows. Notably, in Q2FY21, the company paid cash dividend of CAD 21.2 million, significantly higher than CAD 7.1 million in pcp. Moreover, the stock carries a dividend yield of ~2.9%, which is decent considering the current interest rate scenario.

10-years dividend history, Source: REFINITIV

• Improved Operating metrics: The company reported a revival in its operation, supported by elevated commodity prices, which is a key positive. Crude oil price stood at CAD 68.89/bbl in H1FY21, surged 79% on y-o-y basis. Price of natural gas liquids (NGLs) stood at CAD 23.45/bbl in H1FY21, significantly higher than CAD 8.76/bbl in pcp. Moreover, the company reported higher production and free fund flow in Q2FY21, which is the highest in the last eight quarters.

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 surge was primarily driven by higher income from Condensate, NGLs and Natural gas segments.
• Total expenses surged from CAD 234.5 to CAD 925.1 million in Q2FY21, due to higher commodities purchased from third parties, increase in Operating and Transportation costs, coupled with 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 a price volatility would likely to dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21, the company expects total production of 287,000 - 302,000 boe/day, which includes 64,000 - 70,500 bbl/day from Crude oil and condensate, while NGLs production is estimated within 40,000 - 42,000 bbl/day. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Vermilion Energy Inc, MEG Energy Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 9.19 on September 01, 2021.

One-Year Technical Price Chart (as on September 01, 2021). Source: REFINITIV, Analysis by Kalkine Group

*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.