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

Key highlights

• Divested Duvernay and Eagle Ford assets: The company recently reached an agreement to sell its Duvernay assets for USD 263 million and its Eagle Ford assets for USD 880 million. The funds from these newly planned divestitures would be used to reduce the company's net long-term debt.

• Curtailing debts: The group is also working to improve its balance sheet and liquidity status. The Company has dedicated USD 948 million in surplus cash flows to reduce its gross long-term debt balance after the second quarter of 2020. The group minimized net long-term debt by USD 467 million in the first quarter of 2021. Furthermore, by the first half of FY2020, it plans to have a USD 4.5 billion long-term debt balance, which is admirable.

Source: Company

• Rise in cash from operating activities and free cash flows: Healthy operations from all segments and higher average realized prices helped the company deriving significant free cash flow. Cash from operating activities in Q1 2021 stood at USD 827 million, non-GAAP cash flow was USD 890 million, and capital investment totalled USD 350 million, resulting in USD 540 million of non-GAAP free cash flow.

Source: Company 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted higher product and services revenue which stood at USD 2,247 million compared to USD 1,570 million in the previous corresponding period. However, the net revenue declined to USD 1,838 million, against USD 2,643 million due to loss of risk management.
• The operating income stood at USD 195 million, against USD 759 million in the previous corresponding period. The decline was primarily due to lower net revenues, although the company’s total operating expenses fell to USD 1,643 million V/s USD 1,884 million in pcp.
• On the back of income tax recovery, the company’s net earnings stood at USD 309 million, against USD 421 million in pcp.

Risks associated with investment

Since the firm operates in the oil and gas exploration industry, its sales are linked to oil prices. Oil price uncertainty is likely to affect the group's results. Low demand for oil and gas and financial risk on behalf of their hedged positions are other factors that may affect their financial results.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Refinitiv 

Stock recommendation

As oil demand recovers and the energy market outlook changes in 2021, the Company would use its discretion and discipline to maximize capital allocation. The Company is looking at new opportunities to cut upstream operational and administrative costs, and it hopes to see long-term cost savings and efficiencies that will help it boost cash flow. In addition, the Company's balance sheet and liquidity situation are improving. Its gross long-term debt was lowered by USD 467 million in Q1 2021, and it estimates its total long-term debt balance to be USD 4.5 billion by the first half of 2022, which is a significant positive. Furthermore, we expect that the reopening of industries and processing units will increase demand for oil and gas, which will help the firm liquidate its inventory. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 29.99 on May 21, 2021. We have considered Vermilion Energy Inc, Tourmaline Oil Corp, Baytex Energy Corp etc. as the peer group for the comparison.

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

1-Year Price Chart (as on May 21, 2021). Source: Refinitiv

ARC Resources 

ARC Resources (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.

Key highlights 

• Acquires Seven Generations: The company recently completed the strategic Montney merger with Seven Generations Energy Ltd., resulting in creating the premier Montney supplier and pioneer in responsible energy growth. The company is currently Canada's largest condensate producer, the third-largest producer of natural gas, and the sixth-largest offshore oil group. We believe with this acquisition; the company hold de-risked core development opportunities with significant commodity and geographic diversity.

• Production guidance: Important turnaround activity and the expected effect of spring break-up would affect the company's field operations and productivity in the second quarter of 2021. As a result, it expects production in the second quarter of 2021 to be around 7% lower than the cumulative pro forma production of 351,204 boe per day in the first quarter of 2021. Production during the second half of 2021 is expected to average approximately 340,000 boe per day.

Source: Company 

• Decent Funds from Operations and Free Funds Flow: The group clocked CAD 273.9 million in funds from operations in Q1 2021, up 29% from the previous quarter. Higher funds from operations were produced in the period due to increased commodity sales from output due to higher average realized commodity prices. While free cash flows totaled CAD 148.2 million, up to CAD 12.9 million from the previous quarter.

Data Source: Company

• Ample liquidity and a substantial deleveraging: With nearly CAD 1.2 billion of undrawn credit potential in 2021, the firm has sufficient liquidity and a good deleveraging profile. By year-end, it expects its net leverage, minus unpaid lease commitments, to be lowered to the low end of the Company's expected range of 1.0 to 1.5 times annualized funds from operations, based on current forward product prices.

Data Source: Company 

Financial overview of Q1 2021

Data Source: Company 

• In Q1 2021, the company reported higher revenue from commodity sales at CAD 518.6 million, compared to CAD 268.5 million in the previous corresponding period. The rise in revenue was mainly due to higher production coupled with increase in average realization price.
• On the back of lower expenses which stood at CAD 183.0 million, against CAD 1,092.1 million in pcp, the company posted EBIT of CAD 234.7 million compared to loss of CAD 721.6 million.
• Net income reported by the company for the period stood at CAD 178.0 million, against a net loss of CAD 558.4 million in pcp. 

Risks associated with investment

Since the firm is in the oil and gas exploration industry, its sales are linked to oil prices. Oil price uncertainty is likely to influence the group's results. Low demand for oil and gas, as well as financial risk associated with their hedged positions, may have an effect on their financial results. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock recommendation

Although entering a transformational process in a position of great power, the company reported excellent Q1 2021 performance, highlighted by record production and significant free funds flow generation. The group focuses on merging the two businesses and delivering on expected cost cuts and synergies to become a more resilient, sustainable, and productive corporation. Annual synergies of approximately CAD160 million are estimated to be reached by 2022, which is significant. Furthermore, the group aims to maintain output at its core operating areas for the remainder of 2021 while optimizing free funds flow generation and lower its net debt outside lease commitments to the low end of its planned range of 1.0 to 1.5 times by year's end. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 8.97 as on May 21, 2021. We have considered Nuvista Energy Ltd, MEG Energy Corp, Crescent Point Energy Corp. etc, as the peer group for the comparison.

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

1-Year Price Chart (as on May 21, 2021). Source: 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.