CA - Ovintiv May Generate Around $3 Billion In Free Cash Flow By The End Of 2024

2023-09-27 01:40:36 ET

Summary

• Ovintiv's Permian acquisition boosted its oil and condensate production to above 200,000 barrels per day.
• The increased production and strong oil prices led to a projection of over $800 million in 2H 2023 free cash flow at the current strip.
• OVV is also projected to generate approximately $2.2 billion in free cash flow in 2024 at the current strip.
• This will help it pay down some of the debt it added with its Permian acquisition, as well as allow it to repurchase more shares.

Ovintiv's ( OVV ) 2023 transactions have added significantly to its oil production and it should now average over 200,000 barrels per day in oil and condensate production during the second half of 2023 and in 2024.

With oil prices being fairly robust, this results in Ovintiv's projected free cash flow reaching over $800 million for the second half of 2023 and around $2.2 billion in 2024 at current strip prices.

This free cash flow is expected to go primarily towards a combination of share repurchases and debt reductions. I estimate Ovintiv's value at approximately $52 per share in a long-term (after 2024) $75 WTI oil and $3.75 NYMEX gas scenario.

Acquisitions And Divestitures

Earlier in 2023 , Ovintiv made a major $4.275 billion Permian acquisition, acquiring Midland Basin assets from various EnCap portfolio companies. The acquisition was paid for with $3.125 billion in cash and approximately 32.6 million shares.

The acquired assets included approximately 65,000 net acres, mostly located in Martin and Andrews Counties. These assets were producing approximately 75,000 BOEPD (80% oil and condensate) and also came with an estimated 1,050 net locations (including 800 net locations with a projected 35+% IRR at $55 WTI oil).

Ovintiv notes that the acquisition price was approximately 2.8x next twelve months' EBITDA at low-to-mid $70s WTI oil. It also expected a 19% free cash flow yield at those prices, indicating roughly $800 million in free cash flow over the next twelve months after closing.

Production from the acquired assets may start declining in 2024 though as Ovintiv reduces the number of active rigs on the acreage from seven (before the acquisition) to two (by the end of 2023).

Ovintiv also sold off its Bakken assets for $825 million in cash. These assets produced around 37,000 BOEPD (60% oil and condensate) in Q1 2023. While this is a relatively low price of approximately $22,000 per flowing BOE, the decline rate was probably fairly high due to a significant amount of new production coming online. Ovintiv's Bakken production was 32,000 BOEPD in Q4 2022 and under 30,000 BOEPD earlier in 2022.

2H 2023 Outlook

Ovintiv may average approximately 547,000 BOEPD in production during the second half of 2023, including approximately 210,000 barrels per day in oil and condensate production.

At current 2H 2023 strip (including approximately $85 WTI oil and $2.75 NYMEX gas), Ovintiv is projected to generate $4.307 billion in revenues inclusive of hedges. Ovintiv's 2H 2023 hedges are estimated to have $30 million in positive value, with its oil hedges having negative value, but its natural gas hedges having a greater amount of positive value.

Ovintiv is now projected to generate $832 million in 2H 2023 free cash flow before dividends and share repurchases. Ovintiv's free cash flow is expected to be significantly higher in the second half of the year (compared to the first half) due to its Permian acquisition and improved commodity prices.

Ovintiv's quarterly dividend is currently $0.30 per share, resulting in $164 million in projected 2H 2023 dividends. This leaves at least $334 million for Ovintiv to put towards share repurchases and variable dividends related to its 2H 2023 results.

Potential 2024 Outlook

Ovintiv expects its oil and condensate production to average over 200,000 barrels per day in 2024, with its production profile expected to stabilize around 200,000 barrels per day (for oil and condensate production) in the second half of the year. I am thus modeling Ovintiv's oil and condensate production at 205,000 barrels per day for 2024 and its total production at 530,000 BOEPD.

At the current strip of $81 to $82 WTI oil and $3.35 NYMEX gas, Ovintiv would be projected to generate $8.246 billion in revenues net of hedges.

Some of Ovintiv's expenditures may be reduced in 2024. It is aiming for a $2.3 billion capex budget in 2024 at the midpoint of its expectations, compared to $2.765 billion capex for 2023 at the midpoint of guidance. Ovintiv expects improved capital efficiency in 2024, while its production is expected to decline a bit from 2H 2023 levels before stabilizing in mid-2024.

Also, Ovintiv expects market optimization costs to decline by $92 million in 2024 due to the May 2024 end date for its Rockies Express pipeline transportation commitment.

Thus Ovintiv is projected to generate $2.201 billion in free cash flow in 2024 at current strip prices, assuming that its cash taxes are fairly similar to 2023 levels. After its current base dividend, Ovintiv would have approximately $936 million to put towards variable dividends and share repurchases and $936 million to put towards bolt-on acquisitions and debt reduction. This is based on its current framework for post-base dividend free cash flow.

Debt And Valuation

Ovintiv had approximately $6.1 billion in net debt at the end of Q2 2023. It could reduce this to around $4.83 billion in net debt by the end of 2023 if it puts 50% of its post-base dividend free cash flow towards debt reduction.

Ovintiv could also reduce its outstanding share count to around 247 million if it puts the other 50% towards share repurchases.

At long-term prices (after 2024) of $75 WTI oil and $3.75 NYMEX gas, I estimate Ovintiv's value at approximately $52 per share. This is based on estimated 2024 production levels of 530,000 BOEPD and a 3.5x EV to EBITDAX multiple.

At long-term $80 WTI oil and $3.75 gas instead, I would estimate Ovintiv's value at approximately $60 per share.

Conclusion

Ovintiv is now projected to generate a bit over $3 billion in free cash flow during 2H 2023 and 2024 at current strip prices. It benefits from its increased oil production (due to its earlier Permian acquisition) along with oil prices that are averaging in the low-to-mid $80s for the next year and a bit.

This free cash flow can partly go towards paying off the additional debt that Ovintiv took on for its acquisition, as well as reduce its share count.

At my long-term prices of $75 WTI oil and $3.75 NYMEX gas, I estimate Ovintiv's value at approximately $52 per share.

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