Ovintiv is a leading North American energy producer. The company is one of the largest producers of crude oil and condensate from its top-tier, multi-basin portfolio of oil, natural gas liquids and natural gas. Its operations also include the marketing of oil, NGLs and natural gas.
Ovintiv’s operating and reportable segments are: (i) USA Operations; (ii) Canadian Operations; (iii) China Operations; and (iv) Market Optimization. The company, however, exited its China Operations in July 2019.
The company has operations in the U.S. and Canada. Ovintiv’s estimated net reserves comprises ~33% oil, ~27% NGL and 40% natural gas. NGLs and oil accounted for 53% of total production in 2019 and natural gas comprised the remaining 47%.
Investment Data
- Opportunity Score: 29
- Ticker: TSE:OVV
- Sector: Energy
- Industry: Oil & Gas E&P
- Market Cap: 6.83B
- P/E: 0.00
- Dividend Yield: 1.44%
- Payout Ratio (Earnings): 100.00%
- Canadian Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 1/10
- Dividend Income Fit: 4/10
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Revenue Growth & Market Exposure
Ovintiv is highly diversified by resources and geographic locations. The company has the required size and scale as one of the largest oil and condensate producers. With the integration of Newfield Exploration Company, Ovintiv achieved $200 million in annual operating and administrative cost synergies.
The company has a large inventory of high-return future locations in oil and liquids rich plays in North America, including the Permian in Texas, the Anadarko in Oklahoma and the Montney in British Columbia and Alberta.
Ovintiv has a sound track record of achieving efficiency improvements. The company’s large multi-basin portfolio is a strong competitive advantage offering the flexibility and multiple avenues to expand. It has prioritized to maintain leading cost structure and capital efficiency while reducing debt.
The company witnessed an impairment of $3.25 billion given the rapidly falling oil prices during the quarter. Q2 production was also impacted by shut-ins due to commodity price volatility.
The company saved a big amount of cash by spending only $252 million on capex at its low-end of guidance. Ovintiv also stopped working on its future wells to balance the supply chain in the market as well as preserve cash. It ended the quarter with inventory of more than 100 drilled but uncompleted wells.
The company reduced its capex guidance but improved its production guidance for FY 2020. Ovintiv now expects to produce 200Mbbls/d on average during the year-end quarter.
Dividends
Ovintiv has returned $1.7 billion to its stockholders through share buybacks and dividends in the past two years. The company increased its dividend by an impressive 25% last year and sports an annual dividend yield of 3.4% presently. Its current dividend payout ratio is very low at ~11%. Its last dividend raise was, however, -1.3%. Ovintiv’s three-year dividend growth rate stands at 8.2% CAGR.
The company delivered free cash flow even under challenging macro conditions. The company continues investing in high margin liquids plays to drive cash flow. It has a disciplined capital allocation strategy of investing in a limited number of core assets, maximizing profitability through operational and capital efficiencies, and returning capital to shareholders.
Ovintiv is expecting $300 million in cash cost savings in 2021 and has achieved nearly half of its estimated cash cost savings of $200 million in FY 2020. Ovintiv is also expecting 20% gain in capital efficiency versus 2019. The company has a multi-year track record of returning cash.
Ovintiv estimates that excess cash flow over the next six quarters will flow towards the balance sheet and debt reduction. Ovintiv has positioned itself to keep generating free cash inclusive of dividend even at a modest oil price of $35. It is capable of generating an incremental $375 million of cash flow for every $5 move in oil price.
Oil prices have been challenged by the COVID-19 outbreak as the demand has declined. Ovintiv has cut its capital expenditure budget for the remaining year. It also cut costs to adjust to lower oil prices. The company generated $304 million of cash flow, well covering its capital expenditure during the quarter. Ovintiv plans to keep it low till the oil prices decline, and can grow once this slump is over.
Competition
The company competes with the likes of Arc Resources, Freehold Royalties, Enerplus Corp., Vermilion Energy, Canadian Natural Resources, etc. The company’s competitors include national, integrated and independent oil and gas companies, as well as oil and gas marketers. It also competes with other companies focused on alternative forms of energy.
Ovintiv’s high debt load is a reason for concern, however, a majority of its debt matures near 2024. The company has also announced its intent to pay the debt from excess cash flows over the next six quarters. Moreover, stronger energy prices could significantly accelerate its debt reduction plans.
| TickerKey | Ticker | Company | Sector | Industry | Score | Quote | Market Cap | P/E | FPE | EPS | Yield Raw | Yield | PayoutRatio | Payments | Dividend | Chowder | GrowthRating | IncomeRating | Tollbooth | Ambassador | Achiever | Aristocrat | King | Country | Graph |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TSE:CNQ | CNQ | Canadian Natural Resources | Energy | Oil & Gas E & P | 0.59 | 41.67 | 40.75 | 22.21 | 22.21 | 1.88 | 0.0451 | 4.51 | 1.0000 | 4 | 1.88 | 0.1758 | 6 | 7 | Intermediate | YES | YES | YES | NO | Canada | 1 |
| TSE:TOU | TOU | Tourmaline Oil | Basic Materials | Oil & Gas E & P | 0.50 | 28.60 | 8.49 | 8.93 | 8.93 | 3.20 | 0.0224 | 2.24 | 0.2000 | 4 | 0.64 | 0.0224 | 3 | 5 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:OVV | OVV | Ovintiv | Energy | Oil & Gas E & P | 0.29 | 31.63 | 6.83 | 0.00 | 0.00 | -26.29 | 0.0144 | 1.44 | 1.0000 | 4 | 0.38 | 0.0144 | 1 | 4 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:ARX | ARX | Arc Resources | Energy | Oil & Gas E & P | 0.37 | 8.98 | 6.50 | 16.77 | 16.77 | 0.54 | 0.0267 | 2.67 | 0.4444 | 4 | 0.24 | 0.0267 | 1 | 5 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:WCP | WCP | Whitecap Resources Inc. | Energy | Oil & Gas E & P | 0.42 | 5.61 | 3.35 | 8.14 | 8.14 | 0.69 | 0.0108 | 1.08 | 0.0874 | 4 | 0.06 | 0.0108 | 3 | 4 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:PSK | PSK | PrairieSky Royalty Ltd. | Energy | Oil & Gas E & P | 0.30 | 13.71 | 3.07 | 74.37 | 74.37 | 0.18 | 0.0525 | 5.25 | 4.0000 | 12 | 0.72 | 0.0525 | 1 | 4 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:CPG | CPG | Crescent Point Energy | Energy | Oil & Gas E & P | 0.18 | 4.87 | 2.58 | 0.00 | 0.00 | -0.33 | 0.0021 | 0.21 | 1.0000 | 4 | 0.01 | 0.0021 | 0 | 3 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:ERF | ERF | Enerplus Corporation | Energy | Oil & Gas E & P | 0.31 | 7.50 | 1.59 | 0.00 | 0.00 | -4.10 | 0.0528 | 5.28 | 1.0000 | 12 | 0.40 | 0.0528 | 1 | 6 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:VET | VET | Vermillion Energy | Energy | Oil & Gas E & P | 0.24 | 9.37 | 1.49 | 5.09 | 5.09 | 1.84 | 0.0000 | 0.00 | 0.0000 | 12 | 0.00 | 0.0136 | 2 | 0 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:FRU | FRU | Freehold Royalties Ltd | Energy | Oil & Gas E & P | 0.28 | 9.10 | 1.20 | 5870.97 | 5,870.97 | 0.00 | 0.0527 | 5.27 | 1.0000 | 12 | 0.48 | 0.0527 | 1 | 6 | Intermediate | NO | NO | NO | NO | Canada | 1 |
| TSE:BNE | BNE | Bonterra Energy Corp. | Energy | Oil & Gas E & P | 0.04 | 4.34 | 0.15 | 0.00 | 0.00 | -0.72 | 0.0000 | 0.00 | 0.0000 | 12 | 0.00 | 0.0000 | 0 | 0 | Intermediate | NO | NO | NO | NO | Canada | 1 |
Bottom Line
Ovintiv is one of the largest independent oil producer in the sector today. It has positioned itself well to manage the current downturn. The company will generate additional cash flow next year, if oil prices go up.
Ovintiv has proved its credibility by holding scale and generating free cash flow at very low commodity prices. It is focusing on reducing costs on one hand and maintaining scale and generating free cash on the other.
