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

DBRS Limited (DBRS Morningstar) confirmed Ovintiv Inc.’s (Ovintiv or the Company) Issuer Rating and Unsecured Senior Notes rating at BBB (low), both with Stable trends. The ratings confirmation and Stable trends reflect the considerable improvement in the Company's financial risk profile in 2021 and the Company's continued focus on reducing debt.

Ovintiv's financial risk profile has improved significantly in 2021 as higher commodity prices have allowed the Company to deleverage rapidly. The Company generated a material free cash flow (FCF; cash flow after capital expenditure (capex) and dividends) surplus in 2021, which, along with proceeds from asset dispositions concluded in 2021, were primarily used to reduce debt by $2.1 billion. The Company has maintained a focus on strengthening the balance sheet and in H2 2021 revised its net debt target to $3.0 billion (YE2021: $4.6 billion) from the previous $4.5 billion with an intent to direct 75% of FCF surpluses toward the balance sheet until it achieved the leverage target. DBRS Morningstar expects Ovintiv to achieve the Company's leverage target in H1 2023 under its base case commodity price assumptions, which are well below current spot prices. However, given the current strength in commodity prices, the Company expects to achieve its leverage target in H2 2022.

Ovintiv’s strong business risk profile underpins the ratings, supported by its large production base, diversified asset base, improving capital efficiencies, and prudent financial risk management policy. The Company reduced its drilling and completion costs by 11% in 2021 and expects further reductions in 2022. Consequently, and despite inflationary pressure on costs, the Company expects to maintain production (excluding the impact of asset sales concluded in 2021) in 2022 at 500 thousand to 522 thousand barrels of oil equivalent per day while keeping capex flat at $1.50 billion. Ovintiv has hedged (at YE2021) approximately 43% of its expected crude oil and condensate and 89% of expected natural gas production for 2022.

DBRS Morningstar expects the Company to direct expected FCF surpluses in 2022 and 2023 primarily toward strengthening the balance sheet. While Ovintiv's credit metrics have improved at YE2021, they are sensitive to change in commodity prices. DBRS Morningstar will need to see a further reduction in gross debt (approximately $1 billion) to be confident that the improvement in credit metrics can be sustained in a lower price environment. If commodity prices stay higher for longer, the Company could potentially deleverage materially within the next 12 months. If the lease adjusted debt-to-cash flow ratio can be reduced below 2.0 times on a consistent basis, then a positive rating action could be triggered. While unlikely, a negative rating action is possible if the Company's lease adjusted debt-to-cash flow ratio weakens materially as a result of steep decline in commodity prices. DBRS Morningstar believes the Company has sufficient liquidity with $3.5 billion available under its credit facilities as at April 1, 2022, and no scheduled debt maturities until 2024.

ESG CONSIDERATIONS
DBRS Morningstar considered Carbon and GHG Costs as a relevant Environmental factor. This factor was assessed as relevant because compliance with ever-increasing environmental regulations and standards is adding costs for all oil and gas companies, including Ovintiv. There was no Social or Governance factors with a significant or relevant impact on the credit rating.

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 16, 2021; https://www.dbrsmorningstar.com/research/383104) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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).

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 info@dbrsmorningstar.com.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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