Energy Prospectus

I have updated my forecast/valuation model for OVV using my increased oil & gas prices which I highlighted in my Saturday podcast.

My valuation of OVV increases by $6 to $90.

Ovintiv is a large-cap (over 500,000 Boepd of current production) that deserves a lot more "love".
> It is a free cash flow machine that will generate over $3 billion of FCF this year and should generate over $4.5 billion FCF in 2023.
> Operating cash flow went from $7.42/share in 2020, to $12.29/share in 2021 and they are on-tract to $19.82/share in 2022 and $28.07/share in 2023.
> They have already announced plans to double dividends beginning in Q4 2022 and accelerate an already aggressive stock repurchase plan.
> The balance sheet is in good shape today and will be in great shape by year-end.
> I really like the production mix of 36% oil, 48% natural gas & 16% NGLs and their high-quality development drilling inventory.

OVV closed at $56.44 on May 27, up 67.5% YTD.

Dan,

I think you're right that Ovintiv gets overlooked.

I'm reading your report on Ovintiv but I always get stuck on the hedges for everyone. Honestly, I don't find the hedge tables helpful at all. I tried to re-copy them to paper and look at them but its always an exercise in frustration. I know you refer people to look at the tables but it does me zero good to look at something that I'm not understanding.

How about you take Ovintiv and do a hedge session at the next webcast. I've seen multiple readers here ask you what the hedge position is, and I think they're asking because they don't know how to read the tables, just like me. I could be wrong, and if I am, well so be it, but I would prefer to not to keep asking you what they company's hedge position is. Or save us the trouble and just put a % hedged on the company's Forecast, but I'm fine if you want to do a walk-through.

100% agree. Very hard to read the hedge tables and figure out how much production is hedged at what value. Dan, please make this more understandable.

I don't buy anyone with significant hedges when there are other options with ZERO hedges.

Do you want to make 5.00 on ng or 8.00 on NG?
Do you want to make $ 75 on oil or 110 on oil?

That's the way I look at it. That's not to say those aren't good investments. I just prefer the unhedged ones since I'm very bullish on the commodity prices. The hedgers will protect you if prices weaken.

I will buy a hedged company if they have wide collars and or hedges rolling off soon.

My exceptions are AR no hedges in 2023.

So with that in mind, I like PXD, OXY,CLR.

I'm starting to look at the Canadian producers

clr is another one i own, o oil hedges, but some ng hedges

The five companies with the largest gains in the Sweet 16 (AR, CRK, EQT, RRC and CTRA) all have a lot of production hedged for 2022. AR, CRK, EQT and RRC all reported losses in Q1 2022 and they are all up over 100%. "Reported Net Income" or "GAAP Net Income" is extremely misleading for upstream oil & gas companies. Ignore Reported Net Income and focus on Adjusted Operating Cash Flow. < It is the true amount of money (real cash income) that the companies made in the quarter.

The Sweet 16 average YTD gain is 75.25%. If you did not invest in companies just because they hedge some production, you missed most of the gain.

MGY is the only company with zero production hedged. It is up 49.5%, but in the lower quartile of the Sweet 16.
CLR has none of its oil hedged and ~50% of their gas hedged thru Sept and after Sept ~40% of their gas is hedged. CLR is up 54.2% YTD.

All of my forecast/valuation model are based on future realized oil, gas and NGL prices net of estimated cash settlements on their hedges.

Ovintiv reports oil and plant condensate separately but think of them both as oil.
Their guidance is for total oil production of 180,000 to 185,000 barrels of oil per day.
For Q2 thru Q4 2022 they have:
> 5,000 BOPD hedged with Swaps at $60.16/bbl
> 75,000 BOPD hedged with Collars that have ceilings at $70.79
> So, 100,000 to 105,000 BOPD is unhedged
> ~85% of their natural gas is hedged at a weighted average of ~$2.75


For 2023 by forecast is that they will produce ~197,000 BOPD
> For Q1 only 40,000 BOPD is hedged with collars that have ceilings of $114.74
> For Q2 only 40,000 BOPD is hedged with collars that have ceilings of $112.95
> So, since my forecast model assumes that WTI will average $100/bbl, Ovintiv's hedges have no impact on oil prices next year.
> Q1 ~27% of gas is hedged with collars that have $10.46 ceiling and Q2 ~26% of gas is hedged with collars that have ceilings of $4.86

Everything above is clearly set out at the bottom of the forecast model.

Note that if I just tell you the percentage of production each company has hedged it will be misleading unless you know the prices and types of hedges they use. Why not just trust my models?

Dan, I trust your model. But if I want to come up with a value based on much higher than your model, I have a problem figuring that out. I think NG will be much higher than you use ($10 or more) and also think oil could easily be $135 or more and want to see how each of the sweet 16 react to these prices in both 2022 and 2023

You can do that by
> Figure out the company's % of unhedged production.
> Multiple the % times the difference between your future oil or gas price and my guess.
For example, ($135 - $115) x 50% for a company with 50% of oil production unhedged.
> Add that to the realized oil price in my model and the spreadsheet will update automatically.

You have to do it for each future period.

Ok, now I feel like I can compute what I need for hedges

Thanks

You assume that I know exactly what the hedges are. I would like you to put in two price targets with backup. The second one includes much more optimistic pricing for oil and gas. For example, do one based upon 20% higher prices for both oil and NG. Very easy for you to do and help us members that pay you.