Morningstar DBRS Confirms Credit Ratings on Ovintiv Inc. at BBB (low), Stable

DBRS, Inc. (Morningstar DBRS) confirmed Ovintiv Inc.'s (Ovintiv or the Company) Issuer Rating and Unsecured Senior Notes credit rating at BBB (low), both with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends 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 credit 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 Ovintiv continues to deleverage the balance sheet and maintains a lease-adjusted debt-to-cash flow ratio around 1.5 times (x). Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, Ovintiv's operating performance, and/or credit metrics materially weaken, causing the lease-adjusted debt-to-cash flow ratio to stay around 3.0x for an extended period.

EARNINGS OUTLOOK
Ovintiv expects a 3%-4% increase in total production to 605,000 barrels of oil equivalent per day (mboe/d) in 2025 (midpoint of guidance) from an average 585 mboe/d reported in 2024. The 2025 forecast incorporates an increase in natural gas production, partially offset by a decrease in crude oil, condensate, and natural gas liquids (NGLs) production relative to last year. Therefore, natural gas production should constitute a slightly greater share of total production in 2025 than in 2024. The change in product mix will largely be attributable to increased gas contributions from the recently acquired Montney assets located in northwestern Alberta and the near simultaneous divestiture of the Company's oil-weighted Uinta Basin assets in Utah. Morningstar DBRS forecasts Ovintiv's total revenue to range between $9.0 billion and $9.2 billion and for a slight sequential decline in the EBITDA margin to 45% in 2025.

The increase in annual production and reduction in unit operating costs Morningstar DBRS incorporates for 2025 are offset by a lower crude oil price assumption and, secondarily, slightly higher unit transportation costs relative to full year 2024. Our base-case commodity price assumptions can be found in Morningstar DBRS' commentary, "Marketplace Frets Over Burgeoning Trade War and Negative Implications for Crude Oil Demand, Weighing on Oil Prices," dated February 13, 2025.

FINANCIAL OUTLOOK
Ovintiv's 2025 total capital expenditure guidance range is $2.15 billion to $2.25 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 2025 and 2026. On December 31, 2024, total debt was about $5.45 billion. To facilitate the repayment of debt associated with the purchase of the Alberta Montney assets, Ovintiv temporarily paused its share buyback program, starting in October 2024, until the cash borrowed under temporary financing has been repaid. Ovintiv estimates that share buybacks will resume in Q2 2025.

Incorporating these assumptions, Morningstar DBRS expects the Company to make gradual progress toward its long-term total debt target of $4.0 billion. As of December 31, 2024, Ovintiv had approximately $3.63 billion in total liquidity, which Morningstar DBRS regards as adequate. Total liquidity included available credit facilities of $3.50 billion, available uncommitted demand lines of $91 million, and cash and cash equivalents of $42 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 credit rating confirmation follows Ovintiv's operational and development accomplishments in 2024, including ongoing field efficiency gains that resulted in lower well costs derived from innovation and cross-basin learnings across the entire North American portfolio; and cost synergies expected from the combined Montney acquisition and Uinta sale, both completed in January 2025.

Following these transactions, Ovintiv has streamlined its portfolio and focused its resources on core positions in the Montney and Texas Permian, supported by production from holdings in the Anadarko Basin in Oklahoma. Further, Morningstar DBRS notes that the combined transactions have added to the Company's sizable exposure to North American natural gas markets and related gas price volatility.

Morningstar DBRS expects Ovintiv to maintain a lease-adjusted debt-to-cash flow ratio at around 2.0x, commensurate with the BBB (low) credit rating range and underpinning the Stable trends. The Company's liquidity position should remain strong, with committed credit facilities totaling $3.50 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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 & Gas, Oilfield Services, Pipeline, and Midstream Energy Industries (August 12, 2024) https://dbrs.morningstar.com/research/437739.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025) https://dbrs.morningstar.com/research/447186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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/431153.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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