On Thursday, JPMorgan (NYSE:JPM) adjusted its outlook for Ovintiv Inc. (NYSE:OVV), raising the price target to $52.00 from the previous $51.00 while keeping an Overweight rating on the stock. The firm expects a strong third-quarter 2024 report from the energy company, driven by operational performance that meets the higher end of Ovintiv's guidance for crude and condensate volumes.
The analyst from JPMorgan predicts Ovintiv will achieve around 208 thousand barrels of oil equivalent per day (MBo/d), aligning with the top end of the company's forecast range of 204 to 208 MBo/d. Despite this, the analyst forecasts a shortfall in cash flow and EBITDAX (earnings before interest, taxes, depreciation, amortization, and exploration expenses) for the third quarter due to market pricing.
The firm's estimates for earnings per share (EPS) and cash flow per share (CFPS) are at $1.13 and $3.49, respectively, which are below the Street's expectations of $1.30 and $3.73. The projected EBITDAX is $1,030 million, compared to the Street's estimate of $1,127 million.
JPMorgan attributes the anticipated cash flow miss to softer price realizations for crude oil and natural gas, with predictions of crude oil realizations at 96% of the West Texas Intermediate (WTI) benchmark and natural gas realizations at 55% of the New York Mercantile Exchange (NYMEX) prices due to wider differentials. However, the firm expects operational expenses (opex) to be on the lower end of Ovintiv's guidance for the third quarter, estimating $4.27 per barrel of oil equivalent (Boe) compared to the company's range of $4.25-$4.75 per Boe.
Looking ahead, JPMorgan forecasts a free cash flow (FCF) of $380 million for the third quarter of 2024. This is expected to enable Ovintiv to return approximately $229 million to shareholders, in line with the company's return framework, which commits to distributing about 50% of FCF after a base dividend of roughly $79 million.
For the year 2025, the firm models crude and condensate production volumes at 206 MBo/d with a capital expenditure budget of about $2.3 billion. At recent strip prices, the 2025 FCF is projected at $1.26 billion, yielding an estimated 11.5% FCF yield, with potential shareholder returns of approximately $784 million through base dividends and share buybacks.
In other recent news, Ovintiv Inc. has shown encouraging financial performance, surpassing estimates with Q2 net earnings of $340 million and cash flow exceeding $1 billion. The company has also raised its annual production guidance, forecasting approximately $1.9 billion in free cash flow. Amid rumors of potential sales, the company has maintained a strategic focus on reducing debt and enhancing shareholder returns.
Analysts from Truist Securities, UBS, and TD (TSX:TD) Cowen have maintained their Buy ratings on Ovintiv, expressing confidence in the company's financial strategy and operational efficiency. Despite a slight reduction in its price target for Ovintiv to $61 from the previous $62, RBC (TSX:RY) Capital maintains a Sector Perform rating, anticipating balance sheet improvements in the latter half of the year.
InvestingPro Insights
To complement JPMorgan's analysis of Ovintiv Inc. (NYSE:OVV), recent data from InvestingPro provides additional context for investors. Ovintiv's market capitalization stands at $10.77 billion, with a price-to-earnings (P/E) ratio of 5.73, indicating a potentially undervalued stock relative to earnings. This aligns with JPMorgan's Overweight rating and increased price target.
InvestingPro Tips highlight that Ovintiv has raised its dividend for 5 consecutive years, demonstrating a commitment to shareholder returns that supports JPMorgan's projection of continued distributions. The company's profitability over the last twelve months and analysts' predictions of profitability this year reinforce the positive outlook on Ovintiv's financial health.
However, investors should note that 10 analysts have revised their earnings downwards for the upcoming period, which may explain JPMorgan's forecasts being below Street expectations. The stock's significant return over the last week (11.51%) and strong return over the last five years suggest long-term resilience, despite recent volatility.
For a more comprehensive analysis, InvestingPro offers 8 additional tips that could provide deeper insights into Ovintiv's financial position and market performance.
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