Fitch revises outlook for Ovintiv to positive, affirms ’BBB-’ rating

Investing.com -- Fitch Ratings has revised its outlook for Ovintiv Inc. (NYSE:OVV) and its Canadian subsidiary, Ovintiv Canada, ULC, to positive from stable. The agency also affirmed the companies’ Long-Term Issuer Default Ratings (IDRs) and senior unsecured ratings at ’BBB-’. The companies’ Short-Term IDRs and Commercial Paper ratings also remain at ’F3’.

The improved outlook is primarily due to the visibility on additional debt repayment, including $1.1 billion in natural maturities due over the next few quarters. Recent acquisitions, including the Montney and earlier Permian transactions, have also contributed to the positive outlook by enhancing the business profile.

Ovintiv’s ratings reflect its size, diversification, conservative financial policy, and robust Free Cash Flow (FCF). The company has made steady progress on debt reduction, with debt at just under $5.5 billion at year-end 2024, compared to approximately $6.2 billion post-Permian acquisition. Fitch anticipates that Ovintiv will make significant progress towards its long-term $4.0 billion debt target over the next 12-18 months, given resilient FCF and favorable near-term natural gas dynamics.

Recent acquisitions have also improved Ovintiv’s business profile. The Paramount Montney acquisition expanded Ovintiv’s position, adding 70kboepd of liquids-rich production and extending inventory life in the Montney to 15-20 years. This acquisition has made Ovintiv the second largest condensate producer in the play. The 2023 Encap acquisition increased Ovintiv’s scale in the Permian, addressing previous inventory concerns. Ovintiv’s production now totals around 610kboepd, placing it in the upper range for ’BBB’ rated companies.

The company is well diversified by product mix and geography. Despite the high-volume exposure to volatile natural gas and lower netbacks compared to diversified peers, Ovintiv has robust credit metrics. As calculated by Fitch, at year-end 2024, Ovintiv had Last Twelve Months (LTM) leverage of 1.2x, interest coverage of 10.7x, and FCF of $892 million.

Ovintiv’s cash flow is driven by condensate and liquids, but its gas mix remains high. The company minimizes exposure to volatile Canadian and Permian basis differentials through transportation and hedges. However, it incurs higher costs to do so. In 2025, only 25% of projected volumes will be exposed to AECO or Waha pricing.

Like its peers, Ovintiv targets a payout ratio of at least 50% post-dividend FCF through share repurchases and variable dividends, while also repaying debt. For the period ending Dec 31, 2024, Ovintiv paid out $316 million in common dividends and repurchased $597 million in shares. The company temporarily paused share repurchases following the announcement of the Montney acquisition, and plans to restart the program in Q2 2025.

Ovintiv’s size is above average compared with peers like APA Corporation (NASDAQ:APA) and Antero Resources Corporation (NYSE:AR), but smaller than Coterra Energy Inc. (NYSE:CTRA), Devon Energy Corporation (NYSE:DVN), and Occidental Petroleum Corp. (NYSE:OXY). Geographic and basin diversification are also above average compared to peers with three core plays (Permian, Anadarko and Montney).

Fitch’s key assumptions for Ovintiv include a WTI oil price of $60/bbl, declining to midcycle levels of $57/bbl by 2028, and Henry Hub natural gas prices of $3.25/mcf in 2025, $3.00/mcf in 2026, and $2.75/mcf in 2027 and the longer term. The agency also expects the company to repay near-term maturities, resulting in debt declining to just under $4.3 billion by forecast end, with most of that happening in 2025 and 2026.

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