3 Catalysts That Make Ovintiv Stock An 'Out of Consensus Idea', Goldman Sachs Says

Ovintiv Inc OVV, a North American producer of oil, condensate and natural gas, is an "out of consensus idea" despite years of underperformance, according to Goldman Sachs.

The Ovintiv Analyst: Neil Mehta upgraded Ovintiv's stock rating from Neutral to Buy with a price target lifted from $26.75 to $29.

The Ovintiv Thesis: Ovintiv's poor performance dates back to 2014, mostly due to lower free cash flow/returns and increased leverage from acquisitions, Mehta wrote in the upgrade note. As such, Wall Street analysts have reason to overlook the stock after it underperformed its peers by 56%.

However, Ovintiv boasts three catalysts that can help reverse years of poor performance, the analyst wrote. First, management deserves credit for lowering well costs by around 25% in the fourth quarter due to efficiency gains, recent developments and new technology implementation.

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Second, the company is expected to generate around $1 billion in free cash flow in 2021 if WTI trends at $50 a barrel and natural gas prices trend near $2.75/MMBtu. If oil trades near Goldman Sachs' forecast of $69.75 to $72 per barrel, Ovintiv could see as much as $1.8 billion to $2.3 billion in free cash flow in 2021 and 2022. The incremental cash can be used to lower debt and return cash to shareholders.

Third, Ovintiv's stock is trading at an attractive free cash flow yield of 29% in 2021 and 37% in 2022 versus its peers at 17% and 18%, respectively. The stock also trades at a discount to its peers at 2021/22 EV/EBITDA of 3.8 times/2.7 times versus 4.5 times and 3.5 times.

OVV Price Action: Shares of Ovintiv were trading lower by 1.57% late Monday afternoon at $23.88.

(Photo: Ron via Flickr)