Ovintiv Inc.

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

Q2FY20 Income Statement Highlights: OVV declared its second quarter results, wherein the Company reported Total Revenues of USD 726 million, as compared to USD 2,055 million in the previous corresponding quarter. The significant decline in the top-line was primarily attributed to a lower Product and service revenues coupled with losses on risk management. Total average production stood at ~ 537 MBOE/day of oil equivalent while Crude and condensate production averaged 198 Mbbls/day. The Company reported an operating loss of USD 4,059 million as compared to an operating income of USD 538 million in the previous corresponding period (pcp). The decline was majorly attributable to a lower top-line coupled with the inclusion of impairments expense (USD 3,250 million) and elevated administrative costs, while other input costs stood lower than the previous corresponding quarter. The Group ended the quarter with cash and cash equivalents of USD 39 million and total assets of USD 16,795 million. During the quarter, the Group reduced its ~25% of the total workforce to improve its cost structure.

Q2FY20 Income Statement highlights (Source: Company Reports)

Risks: The group’s topline is correlated to the oil prices. Any fluctuation in oil prices is likely to affect the group’s performance. Also, any further outbreak of the novel virus would jolt the oil demand, which in turn would impact the group’s performance.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock corrected ~57% so far this year following a steep correction in crude oil price and demand. The group's second quarter results impacted by the COVID-19 pandemic. To weather the challenging time, the group is focusing on cost-cutting measures and targeting to achieve more than USD 200 million in cost savings. The group mentioned that it had achieved half of the cost savings target in the first half of the year. The company is likely to continue with capital investments, however at a slower pace. The group is targeting to invest USD 1.8 billion in capital spending, which is at the lower end of the earlier guidance of USD 1.8 billion to USD 1.9 billion. The group is focusing on deleveraging its balance sheet and stated that all the excess cash flow would be utilized in debt repayment. The group is substantially hedged on near-term, benchmark oil price risk. For the third quarter, 175 Mbbls/d are hedged at an average price of USD 45.06 per barrel. Further, the group has ample liquidity of USD 3.0 billion, which seems to be enough to meet the near-term requirement. We expect the demand for crude oil to improve gradually as the governments across the states are easing the lockdown restrictions and allowing industrial activities to resume. A recovery in demand would help in stabilizing the oil prices, which bode well for the company. The stock soared ~48% in the last three months and outperformed the index by ~36%. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered the peers like Crescent Point Energy, Enerplus Corp, and Obsidian Energy Ltd etc. Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 12.96 on July 31, 2020.

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

Husky Energy

Husky Energy (TSX: HSE) is one of Canada's largest integrated energy companies, operating in western Canada, the United States, and the Asia-Pacific and Atlantic regions. The upstream portfolio includes light and medium crude, heavy crude, bitumen, natural gas liquids, and natural gas. The Group’s heavy oil and oil sands production are supported by two integrated downstream and midstream value chains. 

The Management approved a quarterly dividend of CAD 0.0125 per common share, payable on October 01, 2020.

Q2FY20 Financial Highlights: HSE declared its quarterly results, wherein the Company reported revenues, net of royalties at CAD 2,378 million, significantly lower than CAD 5,337 million in the previous corresponding period (pcp). Production, during the quarter, stood at 246.5 mboe/day, declined from 268.4 mboe/day in pcp. The quarter reported throughput of 281.3 mboe/day as compared to 340.3 mboe/day in pcp. Loss from operating activities stood at CAD 0.323 million as compared to an income of CAD 230 million in pcp, primarily due to a lower sale while slightly offset by a subsequent decline in the total expenses. Net loss stood at CAD 304 million as compared to a net profit of CAD 370 million in pcp, due to an operating loss, offset by higher foreign exchange gain and a stable finance expense.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: If the COVID-19 outbreak continues, demand for oil is likely to hit severely, which is likely to impact the group’s performance.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock of HSE corrected ~56% in the last one year on account of crude oil price volatility. COVID-19 pandemic presented an unprecedented challenge, and the group responded by reducing capital spending, implementing sustainable cost savings measures and reinforcing liquidity position. The group revised its FY20 capital expenditure guidance to CAD 1,600 million to CAD 1,800 million from the earlier guidance of CAD 2,300 million to CAD 2,500 million to preserve the liquidity. The group has access to CAD 4.9 billion in the form of revolving credit facilities, which seems to be sufficient to meet the near-term requirements. The group do not have any near-term major debt maturities except CAD 500 million maturing in 2022. Further, the group maintained its investment-grade credit rating in a recent review done by credit agencies, which is encouraging. The group's Integrated Corridor business is uniquely positioned to capture margin opportunities in volatile market conditions while balancing upstream production and refinery throughput with product demand in the key markets. We expect the Company's top-line would be benefitted from improved crude oil prices aided by improved demand from the recommencing of industrial and manufacturing activities.  We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered the peers like Cenovus Energy Inc, Suncor Energy Inc etc. Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 4.310 as on July 31, 2020.

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

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