Ovintiv Inc.

Ovintiv Inc. (TSX: OVV) is engaged in exploration and production activity of crude oil and natural gas-based in North America.

Recently, the Group announced the retirement of Mr. Mr.Clayton H. Woitas and Mr. Michael McAllister from the posts of the Board Chairman and President, respectively. OVV confirmed that Peter A. Dea has elected as the chairman of the board.

As most of the Oil and Gas producers were battling with low crude oil prices and inventory pile up, due to the lower demand for oil, OVV took prompt measures and lowered its capital investments by 60%, coupled with a cost savings target of USD 200 million for FY20. The Board of Directors declared a quarterly dividend of USD 0.09375 per share of common stock, payable on June 30, 2020.

Guidance: For the second quarter of FY20, capital expenditure is expected within the range of USD 250 to USD 300 million. Further, the Group will also be lowered two-thirds of its operated rig fleet and expects to run seven rigs, and no frac spreads and deferred its completions activity. We expect, the above measures are likely to support the liquidity levels and would ensure smooth cash flow.

Q1FY20 Operational Highlights: OVV declared a stupendous quarterly number and reported total revenue of USD 2,643 million, significantly higher than USD 1,235 million in Q1FY19. The growth in revenue was strongly supported by a considerable gain on risk management amounting to USD 1,055 million, against a loss of USD 355 million in the previous corresponding period. However, income from product and service revenues remained flat at USD 1,570 million, as compared to USD 1,572 million in pcp. On the production front, OVV reported a 20% increase in production from its Permian assets at 109,600 BOE/day followed by an 11% increase to 161,000 BOE/day (11% y-o-y growth) production from Anadarko assets. Montney assets also recorded a higher production of 52,500 bbls/day, up 8% on an annual basis. Total costs during the quarter stood at USD 12.17 per BOE, against USD 13.44/ BOE in the previous corresponding quarter. Operating Income of the Company stood at USD 759 million, as compared to an operating loss of USD 227 million, supported by higher revenue, a decline in total costs, significantly lower administrative expenses, the while inclusion of impairment expense and higher depreciation, depletion & amortization remained as a drag. Net Earnings surged to USD 421 million, as compared to a loss of USD 245 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock corrected ~62% so far this year, due to the drastic correction in crude oil price. However, the recent upsurge in the crude oil prices has supported the investor’s sentiment, and the stock gained ~46% in the last one month, outperforming the index by a significant margin. The group has a strong liquidity position of USD 3.4 billion and is focusing on market diversification to improve its price realization through a blend of derivative financial instruments and physical transportation contracts. Current cost-efficiency strategies are likely to support the cash flow of the business in the near-term, and we believe the Company is likely to surpass the current downturn smoothly. Further, we expect a demand recovery for crude oil and natural gas on account of easing in lockdown restrictions which is likely to support the oil prices and the group’s performance in coming days. The stock is offering an attractive dividend yield of 4.6%, which is likely to appeal several income investors. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Cenovus Energy Inc (TSX: CVE), Crescent Point Energy Corp (TSX: CPG) and Husky Energy Inc. (TSX: HSE) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 11.95 on June 2, 2020.

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

MEG Energy Corp.

MEG Energy Corp. is a Canada-based company, engaged in situ oil sands development and production from Christina Lake Project.

Outlook: For H1FY20, the Company expects production of 76,000 bbls/day, while non -energy operating costs for FY20 is expected within the range of CAD 140 million to CAD 150 million. G&A expense is estimated within CAD 52.5 million to CAD 55 million in FY20. The Company expects its capital expenditure for FY20 at around CAD 150 million.

Q1FY20 Financial Highlights: During the quarter, the group’s realized price declined to USD 27.12 per barrel compared to USD 42.83 per barrel in Q4FY19. Reported revenue stood lower at CAD 665 million, as compared to CAD 919 million, primarily attributed to a lower WTI price during the quarter. Loss before income tax widened to CAD 286 million, from CAD 93 million in Q1FY19. The decline was primarily attributable to lower income coupled with inclusion of exploration expense, foreign exchange loss and a higher depletion & depreciation expense, partially supported by lower diluent and transportation costs, lower purchased product followed by a risk management gain. Transportation and storage costs averaged USD 4.39 per barrel of AWB blend sales in the first quarter of FY20 against USD 5.69 per barrel of AWB blend sales in Q4FY19. Net loss widened to CAD 284 million, as compared to CAD 48 million in the previous corresponding period. The Company exited the quarter with cash and cash equivalent of CAD 62 million and total assets of CAD 7,531 million. Capital expenditures during the quarter stood at CAD 54 million, against CAD 72 million in Q4FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of MEG ~54% so far this year due to the stiff correction in crude oil prices. As a result, the market witnessed severe selling pressure, particularly the oil-producing companies. The Company is taking steps to reduce its non-energy operating costs and G&A expense in order to support liquidity and cash flows. The group seems to have sufficient liquidity to surpass the current challenging environment. Further, the earliest maturing long-term debt of the MEG is due in March 2024, provides a cushion to the cash flow. We expect the Crude oil price to improve in coming days on account of higher industrial and manufacturing activities across the globe, as several Governments are easing the existing restrictions. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like CE Energy Inc (TSX: CVE), Baytex Energy Corp (TSX: BTE) and Tourmaline Oil Corp (TSX: TOU) etc. as a peer group. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 3.65 on June 2, 2020.     

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

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