Ovintiv Inc. (OVV) | Q2'23 Preview—Weak Commodity Pricing Drives Outspend

Modeling Adjustments. Our Q2'23 and FY'23 adjustments reflect updated production and commodity price assumptions. We lower our Q2 estimates on gas/NGL prices, partially offset by stronger gas production and lower GP&T expenses. We also increase our service cost deflation assumption for 2024. We are modeling Q2'23 Adj. EBITDA/ EPS/FCF/Capex of $678MM/$0.64/($86MM)/$686MM, respectively, and FY'23 FCF generation of $295MM. We are modeling cash G&A and interest expenses of $148MM/ $84MM for Q2'23.

Activity Cadence. OVV is currently running 10 horizontal rigs in the US (8 in the Midland and 2 in the Uinta). Notably, the company now expects to reduce Midland Basin rig count to 5 by the end of Q3'23 vs. prior expectation of YE'23. Public data shows 96 / 25 gross spuds / completions through 6/10/23 and 5/15/23, respectively. We expect OVV to provide operational updates on the Uinta play where the company is seeing encouraging results and increasing interest from industry peers.

Production. OVV provided updated Q2'23 and FY'23 guidance upon closing of the A&D transactions on 6/12/23. We expect total production (533 mboe/d) to be higher than midpoint of the Q2'23 guidance range (520-540), due to stronger-than-expected gas production (driven by lower Canadian royalty). For H2'23, we expect production to peak in Q4 with FY'23 total production towards the high end of guidance range, given high activity levels on acquired acreage during Q2 and Q3.

Capex & Cost Deflation. OVV has seen ancillary service costs (cementing, wireline, coil tubing, etc.) come down from peak levels, but mgmt has not seen cost savings on the drilling and completion side just yet. Recall that OVV entered the year with a little over 1/3 of their FY'23 capital budget pricing locked in. We note that OVV's rig and frac crew contracts are typically 12-months long, with the option to revisit pricing for some of those contracts throughout the year.

Price Realizations. We lower our pre-hedge natural gas and NGLs price realizations to $1.93/mcf (~92% of HH) and $17.65/bbl (~24% of WTI), respectively, for Q2'23 on the weaker commodity price backdrop. We expect per unit transportation and processing costs ($8.80/boe) to decline sequentially on lower natural gas prices. During Q2'23, OVV issued $2.3bn of senior notes to fund the Midland acquisitions for a weighted average interest rate of ~6% vs. Q1'23 annualized effective interest rate of ~9%.

Maintain EW rating and raise PT to $39 from $36. We expect lower Q2'23 financials vs. consensus after mark-to-market for lower gas / NGLs prices. Positives are dropping rigs in the Midland faster than expected and lower-than-expected financing cost.