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Should You Buy Ovintiv Stock Amid Attractive Valuation or Hold?
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Ovintiv Inc. (OVV - Free Report) is currently considered undervalued, trading at a 3.37x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 4.58x.
Image Source: Zacks Investment Research
Ovintiv makes money by finding, extracting and selling oil and natural gas, as well as transporting and processing these resources. While a discounted valuation can indicate a buying opportunity, this is important to assess whether Ovintiv’s lower valuation is justified by its fundamentals, growth prospects and broader market conditions. A deeper dive into OVV’s operational and financial strengths, as well as its risks, is important to understand whether the company is truly a value play for investors.
Why You Might Consider Buying Ovintiv
Free Cash Flow and Shareholder Returns: OVV has consistently demonstrated strong free cash flow performance. In second-quarter 2024, the company generated $403 million in free cash flow, with expectations to generate $1.9 billion for the full year. This solid cash flow generation positions Ovintiv to return substantial value to its shareholders through dividends and share buybacks.
Image Source: Ovintiv Inc.
This shareholder-friendly approach, combined with the company's ability to repurchase shares and maintain a competitive dividend yield, enhances its attractiveness.
Production Growth Across Multiple Assets: OVV’s diverse asset portfolio provides production growth across its key regions like the Permian, Montney, Anadarko and Uinta. In second-quarter 2024, the company achieved higher-than-expected production levels with 594,000 barrels of oil equivalent per day, driven by strong output in its core plays like the Permian, Montney and Uinta. OVV’s oil and condensate production averaged 208,000 barrels per day, showcasing its resilience in increasing output while controlling costs.
Image Source: Ovintiv Inc.
Competitive Position in the Permian Basin: OVV is a leader in the Permian Basin, benefiting from its focus on innovation and efficiency. The company’s use of Trimulfrac technology and wet sand completions has significantly improved well performance and reduced costs. For example, in second-quarter, Ovintiv drilled its fastest well, a 10,500-foot lateral, in just 6 days and continued to achieve pace-setting results in drilling and completions. This sets its competitive position in one of the most prolific oil-producing regions.
Inventory Depth and Long-Term Sustainability: With a focus on organic and inorganic growth, OVV has added 1,650 premium drilling locations to its portfolio since 2021. This inventory extension boosts the company’s full-cycle returns and ensures the sustainability of its business for the long term. OVV’s strategy allows it to sustain 205,000 barrels per day of oil and condensate production for the next seven to 10 years without a significant increase in capital investment, which is crucial for long-term investors.
Cautionary Factors of Ovintiv Shares
Long-Term Debt Overhang: Despite Ovintiv's efforts to reduce its debt, the company still faces $600 million in near-term maturities. Its ability to meet these obligations hinges on sustaining strong cash flow. A downturn in market conditions could complicate debt repayment and disrupt capital allocation plans. As illustrated in the chart below, OVV’s share price has underperformed year to date when compared with the broader oil and energy sector, as well as key subindustry peers like Suncor Energy Inc. (SU - Free Report) , Cenovus Energy Inc. (CVE - Free Report) and Permian Resources Corporation (PR - Free Report) .
YTD Price Comparison
Image Source: Zacks Investment Research
Commodity Price Sensitivity: Ovintiv's financial performance is heavily dependent on oil and gas prices, which have been volatile. Despite the company's strong operational performance, lower commodity prices in the future can impact its cash flow, profitability and ability to meet OVV’s capital and production guidance. In second-quarter, Ovintiv faced challenges due to lower natural gas prices, impacting overall cash-tax guidance.
Capital Intensity: Ovintiv's long-term sustainability is tied to its ability to maintain production levels with relatively high capital investments. While the company has made significant improvements in capital efficiency, it still requires around $2.3-$2.4 billion annually to sustain production, which will become burdensome if oil prices decline or the cost of capital rises.
Potential for Overdependence on U.S. Operations: Ovintiv's major assets are concentrated in North America, particularly in the U.S. Permian Basin and Canadian Montney region. While these assets are currently performing well, this geographical concentration exposes the company to risks specific to the energy markets of North America, such as pipeline constraints, infrastructure issues and political risks. Any significant disruption in these regions could disproportionately affect Ovintiv's overall performance.
Final Thoughts for OVV Stock
Ovintiv’s current valuation, operational efficiency and robust free cash flow generation certainly make it an attractive candidate for investment. However, the company is also exposed to several risks, including capital intensity, debt obligations and volatility in commodity prices. While Ovintiv’s leadership in the Permian and diverse portfolio offer significant long-term growth potential, the stock’s heavy dependence on favorable market conditions makes it more suitable for risk-tolerant investors. Given the uncertainties, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Should You Buy Ovintiv Stock Amid Attractive Valuation or Hold?
Ovintiv Inc. (OVV - Free Report) is currently considered undervalued, trading at a 3.37x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 4.58x.
Image Source: Zacks Investment Research
Ovintiv makes money by finding, extracting and selling oil and natural gas, as well as transporting and processing these resources. While a discounted valuation can indicate a buying opportunity, this is important to assess whether Ovintiv’s lower valuation is justified by its fundamentals, growth prospects and broader market conditions. A deeper dive into OVV’s operational and financial strengths, as well as its risks, is important to understand whether the company is truly a value play for investors.
Why You Might Consider Buying Ovintiv
Free Cash Flow and Shareholder Returns: OVV has consistently demonstrated strong free cash flow performance. In second-quarter 2024, the company generated $403 million in free cash flow, with expectations to generate $1.9 billion for the full year. This solid cash flow generation positions Ovintiv to return substantial value to its shareholders through dividends and share buybacks.
Image Source: Ovintiv Inc.
This shareholder-friendly approach, combined with the company's ability to repurchase shares and maintain a competitive dividend yield, enhances its attractiveness.
Production Growth Across Multiple Assets: OVV’s diverse asset portfolio provides production growth across its key regions like the Permian, Montney, Anadarko and Uinta. In second-quarter 2024, the company achieved higher-than-expected production levels with 594,000 barrels of oil equivalent per day, driven by strong output in its core plays like the Permian, Montney and Uinta. OVV’s oil and condensate production averaged 208,000 barrels per day, showcasing its resilience in increasing output while controlling costs.
Image Source: Ovintiv Inc.
Competitive Position in the Permian Basin: OVV is a leader in the Permian Basin, benefiting from its focus on innovation and efficiency. The company’s use of Trimulfrac technology and wet sand completions has significantly improved well performance and reduced costs. For example, in second-quarter, Ovintiv drilled its fastest well, a 10,500-foot lateral, in just 6 days and continued to achieve pace-setting results in drilling and completions. This sets its competitive position in one of the most prolific oil-producing regions.
Inventory Depth and Long-Term Sustainability: With a focus on organic and inorganic growth, OVV has added 1,650 premium drilling locations to its portfolio since 2021. This inventory extension boosts the company’s full-cycle returns and ensures the sustainability of its business for the long term. OVV’s strategy allows it to sustain 205,000 barrels per day of oil and condensate production for the next seven to 10 years without a significant increase in capital investment, which is crucial for long-term investors.
Cautionary Factors of Ovintiv Shares
Long-Term Debt Overhang: Despite Ovintiv's efforts to reduce its debt, the company still faces $600 million in near-term maturities. Its ability to meet these obligations hinges on sustaining strong cash flow. A downturn in market conditions could complicate debt repayment and disrupt capital allocation plans. As illustrated in the chart below, OVV’s share price has underperformed year to date when compared with the broader oil and energy sector, as well as key subindustry peers like Suncor Energy Inc. (SU - Free Report) , Cenovus Energy Inc. (CVE - Free Report) and Permian Resources Corporation (PR - Free Report) .
YTD Price Comparison
Image Source: Zacks Investment Research
Commodity Price Sensitivity: Ovintiv's financial performance is heavily dependent on oil and gas prices, which have been volatile. Despite the company's strong operational performance, lower commodity prices in the future can impact its cash flow, profitability and ability to meet OVV’s capital and production guidance. In second-quarter, Ovintiv faced challenges due to lower natural gas prices, impacting overall cash-tax guidance.
Capital Intensity: Ovintiv's long-term sustainability is tied to its ability to maintain production levels with relatively high capital investments. While the company has made significant improvements in capital efficiency, it still requires around $2.3-$2.4 billion annually to sustain production, which will become burdensome if oil prices decline or the cost of capital rises.
Potential for Overdependence on U.S. Operations: Ovintiv's major assets are concentrated in North America, particularly in the U.S. Permian Basin and Canadian Montney region. While these assets are currently performing well, this geographical concentration exposes the company to risks specific to the energy markets of North America, such as pipeline constraints, infrastructure issues and political risks. Any significant disruption in these regions could disproportionately affect Ovintiv's overall performance.
Final Thoughts for OVV Stock
Ovintiv’s current valuation, operational efficiency and robust free cash flow generation certainly make it an attractive candidate for investment. However, the company is also exposed to several risks, including capital intensity, debt obligations and volatility in commodity prices. While Ovintiv’s leadership in the Permian and diverse portfolio offer significant long-term growth potential, the stock’s heavy dependence on favorable market conditions makes it more suitable for risk-tolerant investors. Given the uncertainties, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.