DBRS, Inc. (Morningstar DBRS) confirmed Ovintiv Inc.'s (Ovintiv or the Company) Issuer Rating and Unsecured Senior Notes rating at BBB (low), both with Stable trends.
KEY CREDIT RATING CONSIDERATIONS
The confirmation and Stable trend reflect Morningstar DBRS' view that no material changes to Ovintiv's credit fundamentals are expected in the near term. The Issuer rating is based on Ovintiv's (1) large size and multibasin production from its North American holdings; (2) low-cost oil, condensate, and gas resource base; (3) diversified energy commodity product mix; and (4) high operating and capital efficiencies driven by innovation and economies of scale. The key business-risk factors affecting the rating include (1) large planned return of cash to shareholders, (2) relatively high companywide decline rate of about 35% that requires a greater level of capital investment to sustain production, and (3) large exposure to North American natural gas markets.
CREDIT RATING DRIVERS
Morningstar DBRS may consider a positive credit rating action in the medium term if, in combination with a strengthening of Ovintiv's business risk profile, the Company continues to delever the balance sheet and maintain a lease-adjusted debt-to-cash flow ratio consistently below 2.0 times (x). Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, Ovintiv's operating performance, and credit metrics materially weaken for an extended period.
EARNINGS OUTLOOK
Looking ahead, Ovintiv expects a slight decline in 2024 production to 560 thousand barrels of oil equivalent per day (mboe/d) in 2024 (midpoint of guidance) from an average 566 mboe/d reported in 2023. The 2024 forecast incorporates a modest increase in crude oil and condensate production, offset by a decrease in natural gas and natural gas liquids (NGLs) production relative to last year. Therefore, crude oil and condensate production should constitute a slightly greater share of total production in 2024 than in 2023. The change in product mix is largely attributable to increased oil-weighted contributions from legacy and newly acquired assets in the Permian Basin in Texas and, secondarily, from Company operations located in other North American basins. However, Morningstar DBRS forecast Ovintiv's total revenue to sequentially decline by 4%-8% to between $10.0 billion and $10.5 billion and for the EBITDA margin to modestly decline to 39% in 2024. The increase in annual production and reduction in unit operating costs Morningstar DBRS incorporates for 2024 are offset by a lower crude oil price assumption. Our base-case commodity price assumptions can be found in Morningstar DBRS' commentary, 'Oil and Gas Outlook: Slowing Economies and War are Driving Prices and Could Potentially Impact Credit Risk Profiles in 2024' dated January 17, 2024.
FINANCIAL OUTLOOK
Ovintiv's 2024 total capital expenditure guidance is $2.2 billion to $2.4 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Ovintiv to generate significant free cash flow (i.e., cash flow after capital expenditure and dividends) surpluses in 2024 and 2025. At December 31, 2023, total debt was $5.7 billion. While Ovintiv is expected to allocate about 50% of the free cash flow surplus to share repurchases, Morningstar DBRS expects the Company to make gradual progress towards its long-term total debt target of $4.0 billion. As of December 31, 2023, Ovintiv had approximately $3.5 billion in total liquidity, which Morningstar DBRS regards as adequate. Total liquidity included available credit facilities of $3,486 million, available uncommitted demand lines of $234 million, and cash and cash equivalents of $3 million, net of outstanding commercial paper of $270 million.
CREDIT RATING RATIONALE
Ovintiv holds large, low-cost positions in prolific producing basins. Reinforcing that, the Company continuously focuses on cost-reduction measures, including ongoing pursuit of operating and capital efficiency gains and pruning relatively low-margin operations and developments from its portfolio of holdings.
This confirmation follows Ovintiv's operational and development accomplishments in 2023, including the acquisition and integration of assets adjacent to existing Company operations in the Midland Basin, a component of the Permian Basin in Texas; the sale of its entire Bakken Shale position in North Dakota; and ongoing efficiency gains derived from innovation and cross-basin learnings across the entire North American portfolio, which also includes the Montney Formation in Western Canada, the Anadarko Basin in Oklahoma and the Uinta Basin in Utah.
Morningstar DBRS expects Ovintiv to maintain a lease-adjusted debt-to-cash flow ratio at around 2.0x, commensurate with the BBB (low) rating range and underpinning the Stable trend. The Company's liquidity position should remain strong, with committed credit facilities totaling $3.5 billion forecast to remain largely undrawn through the forecast period.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Ovintiv. This factor is relevant because ever-increasing environmental regulations targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies. Ovintiv's balance sheet strength, relatively lower carbon footprint because of its natural-gas weighted production, and ongoing emission reduction initiatives provide it with the financial flexibility to navigate the energy transition path.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Ovintiv, the BRA factors were considered in the order of importance contemplated in the methodology.
(B) Weighting of FRA Factors
In the analysis of Ovintiv, the FRA factors were considered in the order of importance contemplated in the methodology.
(C) Weighting of the BRA and the FRA
In the analysis of Ovintiv, the BRA carries greater weight than the FRA.
Notes:
All figures are in U.S. dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2023), https://dbrs.morningstar.com/research/419228.
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429
OVINTIV INC. 
