Here's Why Retain Strategy is Apt for Ovintiv Stock Now

Ovintiv Inc. OVV is a well-known oil and gas exploration and production company based in Denver, CO. The company operates in the United States and Canada, focusing on finding, developing and producing natural gas, oil and natural gas liquids. OVV has valuable assets in key oil fields in North America, such as the Permian Basin in Texas, the Anadarko Basin in Oklahoma and the Montney region in Canada. These areas are known for being highly productive and cost-effective, providing a strong foundation for the company’s growth.

After changing its name from Encana Corporation in 2020, OVV has focused on smart growth, improving operations and maintaining financial health. This makes it an important player in the oil-energy sector. For investors interested in energy stocks, OVV offers several good reasons to consider it. Let us discuss them.

What is Fueling OVV Stock’s Growth?

Smart Buying and Selling of Assets: OVV keeps improving its business by buying good assets and selling less profitable ones. In 2024, it bought Montney (a strong oil area) and sold Uinta (a weaker asset). This smart decision-making helps the company focus on areas that make more money, giving investors confidence that OVV will continue to grow profitably.

Flexible Investment Strategy: OVV can invest money in different oil basins depending on market conditions. If oil prices drop, it can invest more in Montney, where oil production is cheaper. This flexibility means OVV can always focus on the most profitable areas, helping it earn stable cash flow even when oil prices fluctuate.

Low-Cost Production Helps During Tough Times: OVV produces oil at a lower cost than many competitors. In 2024, its Permian drilling cost was just $600 per foot, while in Montney, the cost was only $525. This makes OVV strong even when oil prices fall because it can still make a profit while other companies struggle.

Surpassing Industry Rivals: In the past three months, OVV has outperformed many of its competitors in the Zacks United States Exploration and Production subindustry, including companies like Permian Resources Corporation PR, Northern Oil and Gas, Inc. (NOG) and SM Energy SM. Such an outperformance in a fluctuating market shows that the stock with a VGM Score of B can perform well in a tough industry, indicating good potential for growth.

Analyzing 3-Month Stock Performance

Higher Demand for Gas From Canada’s LNG Exports: Canada is increasing gas exports with new LNG projects, which means OVV’s Montney gas assets will be in high demand. As new export routes open, the price of gas from Canada will go up, increasing OVV’s earnings. The company has also planned smart transport routes to sell gas at premium prices.

Though OVV has good potential for growth, there are a few challenges that could affect its performance.

What Could Affect OVV’s Success?

Rising Costs in Oilfield Services: OVV depends on outside companies for drilling and transportation. If the costs of these services go up due to labor shortages or inflation, then OVV’s expenses will increase. Even though it reduced costs in 2024, rising prices could hurt profits, especially in places like the Permian, where operations are expensive.

Price Risk for Canadian Oil: OVV’s Montney asset produces oil in Canada, where prices are often lower than the United Staes because of pipeline delays and lack of refining capacity. If pipeline issues continue, OVV may have to sell oil at lower prices, reducing its revenues and profits from Canada’s operations.

Free Cash Flow May be Overestimated: OVV expects to make $2.1 billion in free cash flow in 2025, assuming oil is $70 per barrel and gas is $4 per thousand cubic feet (Mcf). But if prices drop, actual cash flow could be much lower. This could impact OVV’s ability to pay down debt and return cash to investors, making the stock riskier.

Oil Production May Become Less Efficient:  In many oil fields, companies are noticing that new wells are producing less oil than before. If OVV faces the same problem, it will have to drill more wells to maintain production, increasing costs. This could reduce OVV’s free cash flow, making it difficult to keep up with investor payouts.

Final Thoughts for OVV Stock

Ovintiv is well-positioned for growth due to its strategic decisions, such as acquiring valuable assets like Montney while selling less profitable ones. The company’s flexible investment approach allows it to adjust to market conditions, focusing on low-cost production areas like Montney when oil prices fluctuate. OVV's ability to produce oil at lower costs than many competitors provides it with a strong edge, even in challenging times.

However, the company faces some challenges, including rising costs for oilfield services, which could hurt profitability. Additionally, potential issues with Canadian oil prices due to pipeline delays and overestimated free cash flow projections for 2025 could impact its financial performance.

Given this mix of strengths and potential challenges, investors should consider adopting a hold strategy for now, waiting for a more opportune entry point before adding this Zacks Rank #3 (Hold) stock to their portfolios.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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