Ovintiv (OVV) Update - Feb 8

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dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Ovintiv (OVV) Update - Feb 8

Post by dan_s »

Notes from Truist Financia

While Ovintiv experienced much of the same 4Q weather as other operators, our detailed
analysis forecasts quarterly production and FCF in line with the prior quarter with 2023 FCF
notably sequentially increasing and resulting in a 23% FCF yield, which is among the highest
in our coverage group. We anticipate the company continuing to run relatively diversified
operations with the potential for Montney activity to increase this year. We also anticipate
OVV potentially remaining acquisitive as there are a number of assets we believe would
compliment their existing portfolio, assuming the right price/financing.

Stable Operating Plan with Potential External Addition

We forecast ~9 rigs to run this year (3 Permian, 2 Montney, 2 Anadarko, and 2 Bakken)
with 80+ Permian, nearly 60 Montney, 50+ Anadarko, and nearly 20 Bakken wells this
year. Not surprising given our rig and well forecasts, we estimate total capital spending to
be comprised of ~45% Permian, 20% Montney, 20% Anadarko, and ~15% Bakken. We
anticipate CAPEX to be slightly 1H23 weighted given the number of DUCs coming into
this year, which should translate into production that is more 2H23 weighted. OVV has
previously suggested interest in potential M&A and we believe given a number of variables
there is potential for something sooner than later. However, regardless of a near-term or
other deals, we believe the company will remain active with bolt ons, trades and other smaller
transactions.

Still Subject to Commodity Volatility
While OVV continues to be relatively aggressive with risk management by using commodity
and basis hedges when/where appropriate, the recent natural gas price rollover impacted
the most recent and upcoming results. These active hedging strategies have mitigated
pricing exposure at AECO with 90% of Canadian throughput priced outside AECO (NYMEX,
Chicago, Dawn). For OVV’s Permian production, 95% of gas throughputs are priced outside
of the Waha sales hub, which has experienced temporary negative pricing periods in 3Q22
due to maintenance repairs on basin systems and pipelines. Further, the company has over
20% of oil and natural gas production hedged this year at relatively attractive prices with
decent floors though we still forecast 4Q22 hedged FCF to change by $39mm for each $5/
bbl change in oil, and $10mm for each $0.25/Mcf change in natural gas.


Updating Estimates and Lowering Price Target to $58 from $61
OVV’s three-stream production remains ~50% oil, ~25% NGLs, and ~25% natural gas with
the majority of revenue now more than ever driven by oil production though Canadian
gas also produces solid sales. We have adjusted our model to account for actual 4Q22
commodity prices, lower likely future natural gas prices, continued OFS inflation and
production weather impacts. Our $58 price target is derived from two equally weighted
methodologies, with the first being our ’23 EV/EBITDAX multiple of 3.5x (3.5x and 3.4x
peer group) applied to our 2023E EBITDAX estimate of $5,058MM ($5,206MM prior and
$4,717MM consensus) and the second being a FCF/EV Yield assumption of 14.0% (14%
prior)
Dan Steffens
Energy Prospectus Group
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