Ovintiv Inc. (OVV) Update - Sept 22

[dan_s]

OVV is trading at $26.40 at the time of this post. I have updated my forecast, increasing the natural gas and NGL prices in all of my forecast models.
My current valuation of OVV increases by $3 to $60.

This is a large-cap that deserves a lot more attention. Q2 production was 554,533 Boepd, 36.2% crude oil & condensate, 48.3 natural gas and 15.5% NGLs.

Ovintiv sold some non-core assets in the Eagle Ford and Duvernay shale plays, so production will be down ~3.5% from Q2 to Q3, but it should ramp back up into year-end. Not including the cash proceeds from assets sales, Ovintiv is on pace to generate over $1.7 Billion of free cash flow from operations this year. It deserves to be trading higher than just 2.4 X operating cash flow per share.

TipRanks: "In the last 3 months, 15 ranked analysts set 12-month price targets for OVV. The average price target among the analysts is $40.79." The 15 price targets range from $26.58 to $54.00. All of the older reports are based on much lower ngas and ngl prices than we have today. The really low ones are still using $50/bbl oil price.

Ovintiv recently announced a new capital allocation framework, which supports the Company's goal of unlocking shareholder value by delivering on its strategic priorities of financial strength, increasing cash returns to shareholders, generating superior returns on capital investment, and driving ESG progress.

"We are committed to unlocking shareholder value by delivering on our strategic priorities," said Ovintiv President and CEO, Brendan McCracken. "We are at the forefront of driving innovation to produce oil and gas from shale both profitably and sustainably. We will generate superior returns and free cash flow by continuously improving capital efficiency and expanding margins while driving down emissions. We will deliver that value to our shareholders through disciplined capital allocation. Over the next 10 years, our business is set to generate about $15 billion of free cash flow at $55 per barrel WTI flat oil pricing and would generate about $21 billion at $65 per barrel. Our capital allocation framework sets out our commitment to financial strength, generating superior returns on the capital we invest, returning cash to our shareholders, and driving ESG progress."

Key highlights of the capital allocation framework include:

Increasing Cash Returns to Shareholders
Beginning in the fourth quarter of 2021, and until Ovintiv reaches its $3 billion net debt target, the company plans to return 25% of the previous quarter's free cash flow after base dividends to its shareholders through share buybacks and/or variable dividends. The remaining 75% will primarily be allocated to net debt reduction, with a modest amount allocated to small, low-cost property bolt-ons.

In 2022, using commodity price assumptions of $60 per bbl for WTI oil and $3.00 per Mcf for NYMEX natural gas, the Company anticipates that it will deliver approximately $550 million of direct shareholder returns through its $150 million base dividend and an additional $400 million in share buybacks or variable dividends. This cash return would represent a cash yield of more than seven percent.

Once the Company reaches its net debt target of $3 billion, it plans to increase quarterly shareholder returns to at least 50% of the previous quarter's free cash flow after base dividends.

Maintaining Reinvestment Rate of Less Than 75%
Ovintiv reaffirmed its long-term commitment to reinvest less than 75% of non-GAAP cash flow at mid-cycle prices. In 2021, the Company's expected capital investment of $1.5 billion represents a cash flow reinvestment rate of less than 50%. < This compares to my operating cash flow forecast of $3.268 Billion for 2021.

Sustainable Base Dividend
Providing shareholders with a sustainable base dividend which grows over time is a key focus for the Company. In July of 2021, Ovintiv increased its quarterly dividend payment by approximately 50% to $0.14 per share, payable on September 30, 2021, to common stockholders of record as of September 15, 2021. This was the second time the dividend was increased since 2019.

Continued Focus on Net Debt Reduction
Ovintiv remains committed to reducing net debt. By year-end 2021, the Company expects net debt to be below $4.5 billion, marking approximately $3 billion of net debt reduction since the second quarter of 2020.

The Company previously set a net debt target of $3 billion, which it expects to achieve by or before year-end 2023, assuming $50 per bbl WTI oil and $2.75 per Mcf NYMEX natural gas prices.

Highly Repeatable Capital Program

With more than a decade of premium drilling inventory in each of its core three assets – the Permian, Anadarko and Montney - Ovintiv is well positioned to continue delivering industry-leading capital efficiencies for many years to come.

The Company views the capital efficiency of its 2021 program as being highly repeatable and it is committed to not grow production into an oversupplied market.

[dan_s]

New report just received from RBC Capital
September 22, 2021
Ovintiv Inc

Whatever it Takes
Our view: Ovintiv’s shareholder returns strategy raises its game in terms
of defining distributions and is anchored by a conservative balance sheet
stance and capable execution. If there is one thing we’d like to see at
Ovintiv, it’s substantially higher direct common share ownership amongst
its leadership team and board of directors. We are maintaining a Sector
Perform rating and one-year target price of $36 per share on Ovintiv.

Key points:
Game Plan Set Forth. Our recent update with Ovintiv’s new CEO, Brendan
McCracken and CFO, Corey Code, was candid and explored the company’s
game plan in some depth along with its recently unveiled shareholder
returns framework. What stood out most from this meeting is that Ovintiv
is unlikely to make any sudden moves with respect to large scale mergers &
acquisitions and that it will do what it takes to improve its relative valuation.

Capital Allocation Framework. Ovintiv’s near-term free cash flow will be
weighted towards net debt reduction, with a shift to a more balanced
approach once the company achieves its $3 billion net debt target. The
company remains committed to reinvest less than 75% of cash flow at mid
cycle prices ($50-$55 WTI and $2.50-$2.75 Henry Hub gas). Ovintiv openly
acknowledged that returns on incremental capital are incredibly attractive
in this oil landscape, but macro conditions—namely the potential for OPEC
+ to open the taps—could result in adverse oil price excursions. < I see near zero chance that OPEC+ will "open the taps".

Shareholder Returns a Priority. Ovintiv’s shareholder returns policy points
towards a mix of share repurchases and/or variable dividends as its
debt levels fall. From the fourth-quarter of 2021 to the point in time
Ovintiv reaches its $3 billion net debt target, the company plans to return
25% of the previous quarter's free cash flow after base dividends to its
shareholders through share buybacks and/or variable dividends. In 2022
(using $60 WTI and $3.00 NYMEX), Ovintiv anticipates that it will deliver
circa $550 million of direct shareholder returns via its $150 million base
dividend and $400 million in share buybacks or variable dividends. Once
the company reaches its $3 billion net debt target, Ovintiv plans to increase
quarterly shareholder returns to at least 50% of the previous quarter's free
cash flow after base dividends.

Relative Valuation. As it stands today, Ovintiv trades at a steep discount
vis-à-vis our peer group. Ovintiv is trading at a discount 2021 debt-adjusted
cash flow multiple of 3.3x (vs. our North American E&P peer group avg.
of 4.6x), and elevated 26% free cash flow yield (vs. our peers group at
16%). We believe the company should trade at a modest discount to
our peer group given its solid execution capability partially off-set by its
unconventional strategic moves in the past, including acquisitions and its
redomiciling initiative.