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.

Recently, Ovintiv and PetroChina Canada Ltd. have agreed to partition the Duvernay acreage and associated infrastructure as each company will independently own and operate their interests. Both the parties would hold ~50% interest across the entire asset with Ovintiv serving as an operator until PetroChina is ready to assume the role on its lands.

Q2FY20 Financial Highlights: OVV declared its quarterly results, wherein the company reported product and service revenue of USD 1,023 million, significantly lower than USD 1,848 million in the previous corresponding period (pcp). The decrease was primarily attributed to a significant fall in the upstream product revenues amounting USD 673 million, against USD 1,594 million in pcp, partially offset by higher income from market optimization segment. Benchmark WTI prices, during the period, was averaged at USD 27.85/bbl, as compared to USD 59.82/bbl in pcp. The company posted an operating loss of USD 4,059 million, as compared to an operating profit of USD 538 million in pcp. The drastic decline was primarily due to lower revenue and inclusion of impairments amounting USD 3,250 million, partially offset by a lower operating cost. Net loss was reported at USD 4,383 million, as compared to net earnings of USD 336 million in Q2FY19. The company posted cash and cash equivalent of USD 39 million, while total assets were posted at USD 16,795 million.

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: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of OVV corrected ~56% so far this year, due to a steep correction in the crude oil prices. To arrest the volatility in the commodity prices, the company has hedged ~94% of expected crude oil and condensate production and ~80% of expected natural gas production for the rest of FY20. 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 focusing on deleveraging its balance sheet and stated that all the excess cash flow would be utilized in debt repayment. Further, the group has ample liquidity of USD 3.0 billion, which seems to be enough to meet the near-term requirement. With the reopening of economy, manufacturing and industrial activities are expected to commence, which would lead to higher demand and increase in the crude oil prices and subsequently support the company’s performance. We have valued the stock using Price to Cash flow-based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Crescent Point Energy Corp, Devon Energy Corp etc. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 13.31 on September 18, 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.

Key Highlights:

• The company disclosed the current status of its development and construction activities. Construction at Argentia and Marystown was suspended in March 2020, and the project was 60% complete till date. The company reported a hold on all the major construction while expects a delay of at roughly one year due to a tight offshore weather window.
• Recently, the company reported the completion of the Spruce Lake Central thermal project in Saskatchewan and is moving towards startup of the Liuhua 29-1 field at the Liwan Gas Project.

Q2FY20 Financial Highlights: Husky announced its quarterly results, wherein the company reported revenues, net of royalties at CAD 2,378 million, declined significantly from CAD 5,337 million in the Q2FY19. Total upstream production stood at 246.5 mboe/day, declined from 268.4 mboe/day in the previous corresponding period (pcp). The group reported a throughput of 281.3 mboe/day during the quarter, against 340.3 mboe/day in pcp. The decrease in the production was due to lower output from Integrated Corridor operations as the throughput was adjusted and optimized as per the changing market conditions. Loss from operating activities stood at CAD 0.323 million as compared to an income of CAD 230 million in pcp, due to lower revenue, partially offset lower operating costs. Net loss, during the quarter, 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. The company ended the quarter with cash and cash equivalent of CAD 633 million, while total assets stood at CAD 29,459 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s construction activities have been delayed due to the current pandemic and are likely to dampen the upcoming performance to an extent. 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: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of HSE corrected ~67% so far this year, due to a tepid sectoral performance in the recent past. Recently, the company completed the Spruce Lake Central thermal project and has started its developing Liuhua 29-1 field at the Liwan Gas Project, which is encouraging. The above two projects are expected to generate immediate strong free cash flow in the coming days, which would support the company's overall operating performance. With the gradual reopening of the economy, the company is likely to witness an improved demand and a higher realization price, which would support the cash flows of the company. 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. 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. The stock has gained ~44% in the last six months. We have valued the stock using Price to Cash flow-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Energy) average on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 3.45 on September 18, 2020.

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

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