Analysis of Ovintiv Q1 results

[Petroleum economist]

Ovintiv reported solid Q1 results. Production was at the high end of the outlook. The balance sheet is good, the profitability sound and shareholder returns are generous.

Production
• Q1 production (574.0 K BoE/d) was at the high end of the outlook (560-575 K BoE/d).
• The production was 5.2% below Q4 (605 K BoE/d), part by intent and part due to the impact of winter weather (-8 K BoE/d).
• Q2 outlook of 560-575 K BoE/d indicates that production will be virtually flat. The 2024 outlook (also 560-575 K BoE/d) confirms this. Ovintiv appears reluctant to grow.
• Ovintiv has proven reserves of 2,186 M BoE, equivalent to 10.6 years of 2024 production. Reserves combined with an RRR (1.15 over the last five years) suggests that production in 2025 onwards could grow with 2-3% per year. It appears that Ovintiv is unwilling to commit to the required capex for growth. Possibly the high end of the well creaming curve does not meet screening criteria. I assume that production in 2025/2026 will be flat.
• Fluid composition in Q1 was 30% oil, 7% plant condensates, 15% NGL and 48% gas, indicating a focus on liquids.
• Gas revenues are 20% of the total revenues, indicating that the profitability is not serious affected if the current lower gas prices would be longer sustained.
• Q1 composition (37/15/48) is not in line with reserves (24/24/52), meaning that production over time will become gassier.

Balance sheet
• The balance sheet hardly changed in Q1
• Solvency in Q1 (51.7%) was flat versus Q4 (51.9%). I think the solvency is a bit low, but Ovintiv has been satisfied with this level of solvency since 2016.
• Long term debt ($ 5.345 M) in Q2 was unchanged versus 2023.
• With an EBITDA of $ 4,690 M in 2023, the debt/EBITDA ratio was a good 1.14. With a higher EBITDA in 2024, the debt/EBITDA ratio can drop to <1.0.
• The balance sheet allows shareholder returns.

Profitability
• Q1 net profit was $ 338 M (eps $ 1.24), The net profit included -$ 100 M non-cash hedging losses. I exclude these as I take them in as cash hedging results in the rest of 2024, 2025 and 2026.
• The adjusted eps ($ 1.44) was at the high end of analysts’ expectations ($ 0.94-1.63).
• For 2024 (WTI = $ 80-85/bbl) I expect a net profit (excluding non-cash hedging losses) of $ 1,820-2,010 M (eps = $ 6.75-7.45). The PE is a medium 7.0-7.8.
• Unit costs in 2024 are a medium low $ 28.40/BoE. Interest payments constitute $ 1.82/BoE and have no major impact.
• In 2025/2026, with a higher gas/NGL proces, the eps can increase to $ 7.80-8.80 (PE to a low =5.8-6.7).

Shareholder returns
• Ovintiv pays an interim dividend of $ 0.30, $ 1.20 on an annual basis.
• In Q1 Onvitiv bought back shares for $ 248 M.
• Ovintiv indicated it intends to buy back $ 182 M of shares in Q2.
• With recovering gas/NGL prices in H2, I expect buybacks in Q3/Q4 to return back to the $ 248 M level of Q1.
• Dividends plus share buybacks combined will provide shareholders in 2024 with a high yield (7.8-8.0%).

Conclusion
Ovintiv (formerly Encana) is an attractive investment with generous early returns. Returns can increase with higher gas and NGL prices.

In my project ranking of seventy-two companies, Ovintiv sits just outside the top ten (12th). This is mainly due to the medium to low PE, high returns, and an all-round low risk profile. The balance sheet in my view could do with some reinforcement. Fluid composition (becoming a bit gassier) is a risk.

[dan_s]

Ovintiv has a very good marketing team because natural gas and NGL prices were much higher than I expected. I also think they produce a lot of high BTU gas, which get premium pricing. Higher ngas and ngl prices should offset a bit of oil price weakness.

This year's D&C program is focused on maximizing free cash flow.