Ovintiv (NYSE: OVV) is a nearly $ 10 billion crude oil and natural gas company. The company is focused on improving its financial strength and with a low cost portfolio we expect it to be able to generate substantial cash flow. We believe the company is able to use this cash flow to generate substantial rewards for shareholders.
Ovintiv financial results
Ovintiv has achieved strong financial results with its portfolio given the strength in oil prices.
Ovintiv Financial Results – Presentation to Ovintiv Investors
Ovintiv is focused on $ 148 million in fourth quarter shareholder rewards based on its impressive portfolio. That’s about a 6% return made up of a base dividend of $ 37 million and $ 111 million in additional returns. The company generated $ 480 million in FCF for the quarter, implying an annualized FCF return of 20% showing the strength of the company’s portfolio.
The company continues to invest heavily. The company’s planned capital spending for FY21 is $ 1.5 billion (a 15% return). The company can easily maintain production, or even increase it slightly, with increased capital savings at this range. This indicates that it is not reducing production to support its FCF and its financial positioning.
The company has also aggressively reduced its debt. Its net debt in Q3 2021 is $ 4.8 billion with $ 409 million in quarterly debt reduction. YTD 2021, the company reduced its debt by a whopping $ 2.1 billion, saving $ 100 million in annual interest expense and showing the strength of its overall financial portfolio.
Ovintiv capital efficiency
Ovintiv aims for high capital efficiency within its portfolio.
Ovintiv Capital Efficiency – Presentation Ovintiv Investisseurs
Ovintiv is planning an investment program of $ 1.5 billion in 2022, in line with the company’s 2021 program. The company’s forecast for crude and condensate of 185,000 bbl / day is in line with the company’s production after the asset sale in 2021. The company plans to maintain the scale without DUC inventory.
This capital efficiency is impressive and with further optimization we expect the company to be able to sustain these capital expenditures. If inflationary pressures abate, the company could even increase production to the same levels of capital expenditure, thereby increasing the rewards for shareholders.
Ovintiv debt reduction
Ovintiv focused on significantly improving its debt profile. The company reduced its long-term debt to $ 4.8 billion.
The company has $ 1.8 billion in new debt reductions to meet its goal of $ 3 billion. At this point, the company would save nearly $ 100 million in annual interest payments. Until the company reaches that point, it plans to allocate 75% of its cash flow to improving its balance sheet, before reducing it to 50%.
In the long run, the business can significantly reduce its overall debt load. Reducing it to 0 is something the company could actively do, saving it $ 250 million in cash flow and improving its overall financial positioning. The company plans to maintain 10 years of top-quality inventory without costly mergers and acquisitions as a precursor to this financial position to support its long-term cash flow.
Return potential for Ovintiv shareholders
Ovintiv has the potential to generate significant returns for shareholders, underscoring the strength of its portfolio.
Return potential for Ovintiv shareholders – Presentation to Ovintiv investors
Ovintiv has huge shareholder return potential in 2022. As a perspective, current WTI and HH prices are close to the company’s $ 80 / $ 4.00 targets. It doesn’t matter what the company plans to pay its 1.5% dividend. In the higher pricing scenario, the company will have $ 1.1 billion available to use for buyouts or special dividends.
At its current valuation, we would like it to use them for buybacks given their ability to generate additional returns for shareholders. It’s also worth noting that this does not include the company’s debt reductions. At the $ 80 / $ 4 HH target, the company will spend $ 1.8 billion on debt reductions (for $ 600 million in cash flow), then earn $ 650 million in additional cash flow with 650 million. millions of dollars in additional debt reductions.
This means that in addition to the 13% shareholder return, the company could reduce debt by $ 2.4 billion to a net debt position of $ 2.4 billion. This could save him hundreds of millions of dollars in interest expenses. More so, as the company’s debt approaches $ 0, its financial returns to shareholders could increase dramatically.
This is because in the top price scenario, its total FCF is actually $ 3.6 billion. This is a yield of 36% FCF in the upper price which without the interest paid on its debt increases to 40%. This helps to highlight the current value of buyouts and shows the financial strength of the business. It also helps to cement the thesis of why we recommend investing.
Ovintiv’s biggest risk is the price of oil. Below $ 50 / bbl WTI and $ 2.5 HH, the company’s shareholder returns drop to single digits, making it a worse investment. The company can continue to manage its debt, but its overall ability to generate returns is worse. Since prices have shown the ability to collapse before, this is a risk that could occur at any time.
Ovintiv has an impressive portfolio of assets with a 10 year premium well schedule and continued effectiveness. The company’s core spending is $ 1.5 billion in capital to keep its impressive production low-cost and enable continued rewards for shareholders. The company has been able to maintain this even in an environment of high inflation.
At current prices, the company has the capacity to generate nearly 40% annualized rewards for shareholders. Combined with buyouts sooner rather than later, this could allow the company to generate larger longer-term rewards. However, regardless of how it pays shareholders, the business is a valuable investment.