Ovintiv – high shareholder returns and a medium/low PE, but nobody wants it.

[Petroleum economist]

Dan has Ovintiv in his sweet 16 and rightfully so.

Summary
• Ovintiv ranks a high 7th in my oil and gas companies ranking.
• Ovintiv has very different characteristics from the other high-ranking companies.
• Where other high-ranking companies have either high reserve with growth potential, weak balance sheets in the process of rebuilding, no returns and very low PE’s, recent oil discoveries or projects with new technology, Ovintiv has none of these.
• Ovintiv has a medium/low PE and very high shareholder returns. Combined these push Ovintiv up the rankings.
• If you like a share with an immediate return, then Ovintiv is for you.

Reserves
• Ovintiv reserves are at an average level.
• Proven reserves late 2023 were 2,186 M BoE, equivalent to 10.5 years of 2024 production, slightly above (industry average (9.5-10.0 years).
• Reserves have fluctuated around the 2.2 B BoE level since 2019.
• RRR in the period 2019-2023 was a good 1.15 (industry average 1.02).
• 2023 RRR was -0.12 due to reserves de-bookings.
• The reserves allow a limited production growth (0-2%/year).

Production
• Ovintiv production has been mostly flat since 2019 (2021-Covid exception) and will stay like that for the foreseeable future.
• Q1 production (574.0 K BoE/d) was at the high end of the outlook (560-575 K BoE/d) and -5.2% below Q4 (605 K BoE/d), part by intent and part due to the impact of winter weather (-8 K BoE/d).
• Q2 outlook of 560-575 K BoE/d indicates that production will be flat.
• For 2024 I expect production of 571 K BoE/d (outlook 560-575 K BoE/d), 1% above 2023 (565 K BoE/d).
• From 2025 onwards I see a limited 0-2% growth per year for a period of 8-10 years.
• Fluids consist of 30% oil, 7% condensates, 15% NGL and 48% gas.
• Fluid composition (37/15/48) is not in line with reserves (24/24/52), meaning that production over time will become gassier.

Balance sheet
• The balance sheet is in a reasonably good condition.
• Q1 solvency (51.7%) was flat versus Q4 2023 (51.9%).
• Solvency is a bit low, but Ovintiv has been satisfied with this level of solvency since 2016.
• Q1 long-term debt ($ 5.345 M) was unchanged versus 2023.
• 2023 debt/EBITDA ratio was a good 1.14
• In 2024, with a higher EBITDA (better cash hedging results), the debt/EBITDA ratio can reduce to 1.0
• 2025 onwards the debt/EBITDA can fall below to < 1.0 in line with Ovintiv targets.
• The balance sheet allows shareholder returns.

Profitability
• Ovintiv has a good profitability.
• Ovintiv 2024-unit cost (inclusive depreciation, interest and overheads) are a moderate $ 28.30/BoE. Interest payments constitute $ 1.82/BoE and have no major impact.
• Ovintiv has hedged 39% of its oil and 49% of its gas production. The oil hedges are uneventful but the gas hedges are very attractive and can bring in $ 200 M.
• Q1 net profit was $ 338 M (eps $ 1.24), despite -$ 100 M non-cash hedging losses.
• For 2024 (WTI = $ 80-85/bbl) I expect a net profit (excluding non-cash hedging losses) of $ 1,840-2,030 M (eps = $ 6.75-7.50, PE = 6.1-6.7).
• In 2025/2026, with higher gas and LNG prices, the eps can increase to $ 7.80-9.38 (PE to a low =4.9-6.0).

Shareholder returns
• Ovintiv targets to return > 50% of the free cash flow to shareholders.
• Ovintiv pays a quarterly dividend of $ 0.30, $ 1.20 on an annual basis.
• In Q1 Ovintiv bought back shares for $ 248 M.
• For Q2 Ovintiv indicated it intends to reduce share buyback $ 182 M.
• In Q3/Q4 with recovering gas/NGL prices, I expect share buybacks to return to the $ 248 M level of Q1.
• 2024 shareholder returns (sum of dividend plus share buybacks) are a very high 8.5-9.0%.
• 2025 onwards, with higher gas and LNG prices, shareholder returns can increase.

Conclusions
Ovintiv compared to its peers does not stand out on reserves, production growth, balance sheet or profitability. Despite this Ovintiv ranks very high ((7th) in my oil and gas companies ranking. This is due to the medium/low PE and the high shareholder returns.

Ovintiv is an attractive investment with immediate returns. It is a mystery to me why the share price is not higher.

[dan_s]

I agree. My current valuation of $70.50 is based on 4.5 X annualized operating cash flow per share.
4.5 is a very low valuation multiple for a company of this size.
OVV is a bit "gassy", but that could soon be a big plus for this large-cap. If their realized natural gas price averages $3.25/mcf in 2025, OVV should generate close to $2 billion of free cash flow next year < FCF over $8/share.