Ovintiv Inc. (OVV) Valuation Update - May 10
Posted: Tue May 10, 2022 7:02 pm
OVV closed on May 10 at $43.55.
I have updated my forecast/valuation model for the Company and my current valuation of OVV increases by $4 to $84.
TipRanks: "Since April 21, five energy sector analysts have submitted fresh price targets for OVV of $53 to $80 per share." < I expect several more to update and increase their price targets throughout May. This is a Large-Cap that deserves a lot more "love".
Why is my valuation higher?
>OVV generated over $1 billion of operating cash flow in Q1 and they are on a pace to generate $5 billion of operating cash flow and $3 billion of free cash flow in 2022. Most of the FCF is now going to reduce debt. From yearend 2020 to April 30, 2022 they have reduced the Company's debt from $6.9 billion to $4.1 billion.
> The balance sheet is in great shape. The Company has no senior debt due until $688 million comes due in 2026.
> Debt should be under $3.0 billion by end of Q3 2022. At that point they plan to double the amount of FCF going to shareholders in the form of higher dividends and ramping up stock repurchases. Their currently funded plan is to purchase and retire 10% of their outstanding common stock.
Ovintiv is a new name of an old company ("EnCana").
> Current production is ~500,000 Boepd (49.6% natural gas, 34.6% crude oil & condensate and 15.8% NGLs)
> My valuation multiple of 4.5 X annualized operating cash flow per share is a very low multiple for a company of this size. As debt continues to decline while operating cash flow keeps increasing, a valuation multiple of 6.0 should be justified, which would take my valuation to $112.
> They still have "Bad Hedges" on ~45% of their oil and ~65% of their natural gas for the remainder of 2022, but they are still on track to generate over $3 billion of FCF.
> Their small amount of hedges for 1H 2023 are collars with very high ceilings. If their realized prices are $87/bbl oil, $4.75/mcf of natural gas and $34/bbl of NGLs, Ovintiv could generate over $6 billion of operating cash flow next year.
Conclusion: Add all of this up and a 12-month price target of more than $100/share is reasonable. OVV is almost a "gasser" that is going to get a BIG revenue boost in Q1 2023 from realized natural gas and NGL prices of more than double what they got in Q1 2021.
I have updated my forecast/valuation model for the Company and my current valuation of OVV increases by $4 to $84.
TipRanks: "Since April 21, five energy sector analysts have submitted fresh price targets for OVV of $53 to $80 per share." < I expect several more to update and increase their price targets throughout May. This is a Large-Cap that deserves a lot more "love".
Why is my valuation higher?
>OVV generated over $1 billion of operating cash flow in Q1 and they are on a pace to generate $5 billion of operating cash flow and $3 billion of free cash flow in 2022. Most of the FCF is now going to reduce debt. From yearend 2020 to April 30, 2022 they have reduced the Company's debt from $6.9 billion to $4.1 billion.
> The balance sheet is in great shape. The Company has no senior debt due until $688 million comes due in 2026.
> Debt should be under $3.0 billion by end of Q3 2022. At that point they plan to double the amount of FCF going to shareholders in the form of higher dividends and ramping up stock repurchases. Their currently funded plan is to purchase and retire 10% of their outstanding common stock.
Ovintiv is a new name of an old company ("EnCana").
> Current production is ~500,000 Boepd (49.6% natural gas, 34.6% crude oil & condensate and 15.8% NGLs)
> My valuation multiple of 4.5 X annualized operating cash flow per share is a very low multiple for a company of this size. As debt continues to decline while operating cash flow keeps increasing, a valuation multiple of 6.0 should be justified, which would take my valuation to $112.
> They still have "Bad Hedges" on ~45% of their oil and ~65% of their natural gas for the remainder of 2022, but they are still on track to generate over $3 billion of FCF.
> Their small amount of hedges for 1H 2023 are collars with very high ceilings. If their realized prices are $87/bbl oil, $4.75/mcf of natural gas and $34/bbl of NGLs, Ovintiv could generate over $6 billion of operating cash flow next year.
Conclusion: Add all of this up and a 12-month price target of more than $100/share is reasonable. OVV is almost a "gasser" that is going to get a BIG revenue boost in Q1 2023 from realized natural gas and NGL prices of more than double what they got in Q1 2021.