Ovintiv Inc. (OVV) update from Neal Dingman at Truist Financial this morning. My comments are in blue.
Montney and Overall Company FCF Impress
By our estimates, the Montney is set to generate $2B+ of upstream operating FCF this year
(pre-hedge) with the entire company on track for $4B+ FCF and we forecast potentially more
next year if commodity prices rally. Ovintiv could easily achieve its $3B debt goal by year
end, which would result in even more shareholder returns going forward with the potential
for as much as $3B in buybacks next year. Not only will OVV likely have strong shareholder
returns, in our view, but we forecast the company to have one of the highest 4Q/4Q CFPS
growth profiles in our coverage universe next year. < Neal's free cash flow (FCF) forecast of $4B+ for 2022 is much higher than my FCF forecast of $2.8B FCF. The difference is that my forecast includes the impact of cash settlements on their hedges. My FCF forecast for 2023 is $4.5B+.
OVV highlighted the high returns of its Montney play yesterday showcasing the quality and
depth of its oil and gas plays in the region. A big driver of the returns is the impressive steps
taken to increase Montney market access. Not only will ~65% of gas next year likely be
sold out of AECO including Dawn, Malin, Sumas, and Chicago, but waterborne exports, the
largest factor in the supply-demand balance, should notably ramp in 2025 beginning with
Phase 1 of LNG Canada. OVV’s proactiveness in managing physical and financial AECO
exposure could be another key to their continued upside as 90% of Montney production is
now protected from a weaker 2023-2025 AECO.
Large Scale Gas Inventory Positions Company Well
While nine months ago we had few if any investors screening for E&Ps with natural gas
upside, it has become one of the primary topics as of recently. While the Canadian assets
will take a bit more homework on the part of investors due to the variable royalty rates and
political permit-driven headlines, we expect the >20 years of gas inventory the company
has outlined in the basin will allow OVV to differentiate itself from the group, and potentially
insulate it from a pull back in oil pricing. While the prior quarterly discussions in the E&P
space have been on near-term payouts, as prices decline from recent highs we expect the
longevity of these programs to begin to influence multiples more so than previously.
Updating Estimates and Reiterating $77 Price Target
We have updated our production, capex, pricing, and EBITDAX estimates, after the
company’s Montney Investor Day, with our $77 price remaining unchanged. Our $77 price
target is derived from two equally weighted methodologies, with the first being our ’23
EV/EBITDAX multiple of 3.5x (vs a peer multiple of 3.7x) applied to our 2023E EBITDAX
estimate of $5,864MM (consensus of $5,921MM) and the second being a FCF/ EV Yield
assumption of 15.0%.
• Step up in shareholder returns as debt levels drop
• Accretive transactions, further adding to scale
• Further marketing driven margin improvement and natural gas upside
At the time of this post OVV was trading at $49.48, which compares to First Call's price target of $70.63
My current valuation is $92.00, which is based on 5X annualized operating cash flow per share. < IMO 5X CFPS is conservative for a company of this size with decades of high-quality running room. I do expect OVV's dividends to significantly increase after they reach their debt reduction goals late this year.
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