Ovintiv Inc. (OVV) Update - Dec 14

[dan_s]

Neil Dingmann at Truist has raised his price target from $11 to $16 for OVV. His comments below.

My Take: My valuation of OVV is $17.50. If WTI averages $50/bbl in 2021, OVV should generate approximately $2 Billion of operating cash flow (net of interest on their debt).

What's Incremental To Our View
Ovintiv continues with an active 4Q20 knocking out and bringing online numerous
DUCs/DACs that were built earlier in the year. While we estimate the company to
generate ~$130MM FCF this quarter and >$400MM next year, we forecast leverage to
likely remain ~3x until late 2021 which causes us to remain cautious on the name.
The company appears to be getting a current quarter lift not only from incremental
activity, but oil and NGL prices have also notably improved. Ovintiv should be able
to run a relatively active 2021 with oil/condy production sequentially flat assuming
prices hold in the $40s.

Raise Price Target to $16
Following a solid 3Q20, Ovintiv’s share price has benefited from the recent strength in
beta driven energy stocks having risen ~88% QTD (vs +49% for XOP). The company
appears to have been rewarded by shareholders for its notable steps to present a long-term
business model focused around FCF generation, minimal growth, and a continued reduction
in leverage. In the near-term, we expect Ovintiv to direct all excess cash flow to work the
company’s debt lower while continuing to emphasize its ~75% reinvestment framework. We
believe this should give the company the flexibility to grow EBITDAX in the mid-to-longterm
at a lower risk level than its peers. Adjusting our estimates to reflect our revised 4Q20,
2021, and 2022 outlook, we raise our price target to $16 from $11, reflecting increased
trading multiples driven from the recent rally in the sector. Our new price target is derived
from a forward EV/Truist Securities est. 2022 EBITDAX multiple of 4.3x (4.0x prior and peer
average 5.2x) applied to our 2022E EBITDAX of $2,432MM ($2,351MM prior and consensus
$2,522MM).

Line of Sight Into 2021, but Debt Continues to Loom Large
Ovintiv laid out an active 4Q20 plan on its 3Q20 earnings call, with the plan being for ~70
completed DUCs in the quarter, among other things. Based on third-party data, we believe
Ovintiv completion activity peaked in early 4Q20 when the company was running ~8 U.S.
frac spreads (Source: Enverus) which should help the company reach its previously stated
activity goals. We currently forecast Ovintiv will run 7-10 rigs at any point in time in 2021
with an average of ~4 associated fracs throughout the year generating sequentially flat oil/
condy. These activity assumptions with an associated capital program of ~$1.5Bn, leads to
our flat 2021 production forecast vs our 4Q20 estimates. We remain fans of Ovintiv’s nearterm
plans into next year, though the company’s sizable debt load remains an overhang.
We currently forecast Ovintiv will end 2021 at ~2.9x leverage before dropping to ~2.6x by
YE 2022. While we believe the company will use any and all incremental FCF to accelerate
debt pay down, there is still a hill to climb with regards to leverage and will be on the lookout
for potential external deals in the coming quarters.