Ovintiv Inc. (OVV) Price Target - Jan 30

[dan_s]

Note this morning from RBC Capital

Rating: Sector Perform Price Target: 58.00
Our view: With its formula-driven shareholder returns model in motion, Ovintiv’s
buybacks should move appreciably higher in the quarters to come, particularly as
its hedging positions subside. The company’s 2023 production and capital spending
guidance marks its next potential catalyst. We maintain our Sector Perform rating
and one-year price target price of $58 per share.

TipRanks: "In the last 3 months, 11 ranked analysts set 12-month price targets for OVV. The average price target among the analysts is $65.00."
Here are the most recent updated price targets:
RBC Capital 1/30/2023 $58.00
Wells Fargo 1/24/2023 $71.00
Morgan Stan 1/24/2023 $51.00
JP Morgan 1/23/2023 $61.00
Barclays 1/20/2023 $56.00

At the time of this post OVV was trading at $50.03, which compares to my current valuation of $70.00.

MY TAKE:
> Weather related issued may cause the Company's Q4 production to fall short of my forecast of 524,000 Boepd.
> My production forecast for 2023 is 535,000 (34% crude oil and condensate, 49% natural gas and 17% NGLs) < This is a big company that does not get the attention that it deserves.
> 75% of revenues (net of cash settlements and differentials) should be from the sale of liquids.
> My forecast for 2023 is revenues of $12.4 billion, which compares to TipRanks' forecast of $12.1 billion.
> My operating cash flow forecast is $4,770 million ($19.87/share), which compares to TipRanks' forecast of $19.68/share. < This compares to their 2022 capital expenditures of $1,800 million. I expect their 2023 capex budget to be under $2.0 billion, so they will generate a lot of free cash flow this year.
> Operating CFPS in 2022 was approximately $16.69, based on my Q4 forecast.
Conclusion: Nothing that I see justifies OVV trading for under 3X operating CFPS.

Base Dividend and a BIG Stock Buyback underway

Returns to Shareholders
In July 2022, Ovintiv increased its returns to shareholders from 25% to 50% of the previous quarter's Non-GAAP Free Cash Flow after base dividends through share buybacks.

In the third quarter of 2022, the Company delivered approximately $387 million to shareholders through its base dividend of approximately $62 million and share buybacks totaling approximately $325 million. Fourth quarter shareholder returns are expected to total approximately $250 million, consisting of share buybacks of approximately $188 million and base dividend payments of approximately $62 million, bringing total direct shareholder returns since the third quarter of 2021 to approximately $1.14 billion.

Ovintiv had 249.2 million shares outstanding at 9-30-2022

Share Buyback Program
During the third quarter, Ovintiv purchased for cancellation, approximately 6.7 million shares of common stock outstanding for a total consideration of approximately $325 million. As of September 30, 2022, the Company's 2022 share repurchases totaled approximately 11.2 million shares of common stock at an average price of $47.55 per share, for a total of $531 million. Ovintiv has allocated approximately $188 million, or 50% of third quarter non-GAAP Free Cash Flow after base dividends, to share repurchases in the fourth quarter.

In September, the Company received regulatory approval for the renewal of its NCIB share repurchase program. This enables the Company to purchase, for cancellation or return to treasury, up to approximately 25 million shares of common stock (10% of common shares outstanding) until October 2, 2023. Using a November 4, 2022, closing price of $53.41, and assuming the repurchase of 25 million shares, the 2023 NCIB program would have a cash outlay of approximately $1.3 billion. In the event the Company meets its share repurchase limitation under the NCIB, it has the option to pursue alternative methods to repurchase additional shares.

Dividend Declared
On November 8, 2022, Ovintiv's Board declared a quarterly dividend of $0.25 per share of common stock payable on December 30, 2022, to shareholders of record as of December 15, 2022.
----------------------
I am not a big fan of stock repurchase programs, but this one will have a significant impact on the Company's per share results, which should be very good in 2023.