Ovintiv fundamentals

[Petroleum economist]

Ovintiv (formerly Encana), with WTI = $ 80/bbl, ranks 9th out of 72 companies that I track. Ovintiv has solid reserves, a stable production, an improving balance sheet, good profitability and generous shareholder returns.

Reserves
Proven reserves are 2,186 M BoE (2023) consisting of 24% oil, 24% NGL and 52% gas.
Reserves are equivalent to 10.5 years of 2024 production, slightly above (industry average (9.5-10.0 years).
RRR in 2023 was a poor -0.12, due to the lowering of oil and gas recovery factors. The 2019-2023 average RRR was a good 1.15.
The reserves allow a limited production growth (0-2%/year).

Production
Production in 2023 grew 10.9% from 510 K BoE/d (2022) to 565.6 K BoE/d (2023).
The growth was influenced by the acquisition of Black Swan (+75 K bbl/d), compensated by the sale of Bakken assets (-37 K bbl/d).
For 2024 I expect production to remain flat at 565 K BoE/d (outlook 545-575 K BoE/d). 2024 production is liquid dominated (36% oil, 16% NGL, 48% gas) and originates 59% from the US and 41% from Canada.
After 2024 I see a limited 0-2% growth per year for a period of 8-10 years.
Ovintiv has hedged 35% of its 2024 oil and 48% of its gas production. Late 2023 there were no hedges for 2025.

Balance sheet
The condition of the balance sheet is moderate/good and will improve in 2024,
Ovintiv paid in 2023 $ 3.1 B cash as part of Black Swan acquisition and received $ 825 M for its Bakken assets. Ovintiv issued in 2023 new shares for approx. $ 1.5 B.
Despite the outflow of -$ 0.8 B net cash, solvency in 2023 (51.9%) slightly improved compared to 2022 (51.1%). Debt/EBITDA ratio is a reasonable 1.26.
With WTI = $ 80/bbl and 50% of the FCF directed towards the balance sheet, solvency in 2024 can improve to a good 56.4% and debt/EBITDA ratio to a solid 0.90.
The improved balance sheet means that starting 2025 Ovintiv can afford to steer more funds towards shareholders.

Profitability
With WTI at $ 80-85/bbl, I expect a 2024 net profit of $ 1.9-2.1 B. This equates to an eps of $ 7.20-8.00, and a medium low PE of 6.5-7.2.
Unit costs in 2024 (including depreciation, interest, and general/administration) are at $ 28.88/BoE slightly above average. Interest payments contribute $ 2.05/BoE and have limited impact.
Gas hedges in 2024 are mainly swaps at $ 3.65/MM Btu. They could bring in > $ 200 M.
With only 18% of its revenues coming from gas, Ovintiv is not sensitive to extended low gas prices in 2025 and beyond.
Ovintiv is very profitable.

Shareholder returns
Ovintiv pays a quarterly dividend of $ 0.30. On top of this, Ovintiv in 2023 bought back 10 M shares for $ 426 M. For 2024 I expect the share buy to increase to $ 625 M. Total yield in 2024 thus could be 8.1%.
With less cash required for the balance sheet, yield in 2025 and thereafter can go up to 9.0-10.5%.

Conclusions
With adequate reserves, stable production, an improving balance sheet, good profitability and high shareholder returns Ovintiv is an attractive investment.

[aja57]

Great stuff, PE. Thank you.