DBRS Morningstar Changes Trend on Ovintiv Inc. to Stable from Negative, Confirms Rating at BBB (low)

DBRS Limited (DBRS Morningstar) changed the trends on Ovintiv Inc.’s (Ovintiv or the Company) Issuer Rating and Unsecured Senior Notes rating to Stable from Negative and confirmed the ratings at BBB (low). The change in trend and ratings confirmation reflect the meaningful progress made by the Company toward its deleveraging target and DBRS Morningstar's improved outlook for commodity prices.

In Q1 2021, the Company announced that it signed agreements to sell its Eagle Ford and Duvernay assets (the Asset Sales) for gross proceeds of approximately $1.1 billion. The Asset Sales will have minimal impact on production (approximately 6% of FY2020 production) and are expected to close in Q2 2021. Ovintiv has earmarked the proceeds of the Asset Sales and expected free cash flow (FCF; cash flow after capex and dividends) surplus in 2021 and 2022 to repay debt with a target of reducing its overall debt to $4.5 billion (FY2020: $6.9 billion) by H1 2022. DBRS Morningstar believes this is an achievable target under its base-case commodity price assumptions that were revised upward in February 2021.

Ovintiv’s strong business risk profile underpins the rating, which is supported by its large production base, diversified asset base, improved capital and operating efficiencies, and prudent financial risk management policy with a majority of near-term production protected by commodity hedges. The Company reduced its drilling and completion costs materially in 2020 and expects the majority of savings to be retained in 2021. As a result, before the impact of Asset Sales, the Company expects to maintain production in 2021 at 532 thousand to 542 thousand barrels of oil equivalent per day (mboe/d) despite lower planned capital expenditures (capex) of $1.50 billion (2020 actual: $1.73 billion). The Asset Sales is expected to lower average production in 2021 by approximately 18 mboe/d. In addition, the completion of decommissioning activities at Deep Panuke and expiry of certain transportation and processing costs are expected to reduce legacy cash outflow by $250 million in 2021. Ovintiv has hedged (as at January 31, 2021) approximately two thirds of its expected crude oil and condensate and expected natural gas production for 2021. The hedges provide protection at West Texas Intermediate (WTI) price of approximately $45 per barrel (/bbl) and New York Mercantile Exchange (NYMEX) price of approximately $2.85 per million British thermal units.

DBRS Morningstar expects the Company to generate significant FCF surpluses in 2021 and 2022 under DBRS Morningstar’s base-case assumptions (WTI crude oil (2021: $53/bbl, 2022: $52/bbl) and NYMEX natural gas (2021: $2.75 per thousand cubic feet (mcf), 2022: $2.50/mcf) price assumptions. In addition to proceeds from the Asset Sales, DBRS Morningstar expects the Company to direct the expected FCF surplus toward reducing debt until Ovintiv reaches its deleveraging target. Consequently, DBRS Morningstar expects the Company's key credit metrics to improve materially in 2021 with the lease adjusted debt-to-cash flow ratio improving to around 2.2 times (x). DBRS Morningstar believes the Company has sufficient liquidity with $3.3 billion available under its credit facilities as at December 31, 2020. DBRS Morningstar also expects the Company to repay its upcoming debt maturities of $1.1 billion (in November 2021 and January 2022) from proceeds of the Asset Sales and the expected FCF surplus.

DBRS Morningstar may consider a positive rating action if it believes that the Company's lease adjusted debt-to-cash flow ratio will stay consistently below 2.0x while maintaining its business risk profile. This may materialize if the Company exceeds its deleveraging targets and/or commodity prices trend higher than DBRS Morningstar's base-case assumptions. Conversely, DBRS Morningstar may consider a negative rating action if the Company's lease adjusted debt-to-cash flow ratio weakens materially relative to DBRS Morningstar's expectations outlined above as a result of a steep decline in commodity prices.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 17, 2020; https://www.dbrsmorningstar.com/research/365808), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344).Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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