Should You Buy Ovintiv Stock Amid Attractive Valuation or Hold?

Ovintiv Inc. OVV is currently considered undervalued, trading at a 3.67x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 7.22x.Image Source: Zacks Investment ResearchOvintiv makes money by finding, extracting and selling oil and natural gas, as well as transporting and processing these resources. While a discounted valuation can indicate a buying opportunity, this is important to assess whether OVV’s lower valuation is justified by its fundamentals, growth prospects and broader market conditions. A deeper dive into OVV’s operational and financial strengths, as well as its risks, is important to understand whether the company is truly a value play for investors. Why You Might Consider Buying OvintivStrong Free Cash Flow: OVV delivered $440 million in free cash flow in the third quarter, despite facing lower oil prices. This tells a powerful story about how the company is built to operate profitably even in tough market conditions. For investors, free cash flow is not just a number, rather this is cash, which the company can use to reward its shareholders with dividends, buybacks or reinvestments. Not every oil company can claim this level of operational efficiency, especially when commodity prices are not in its favor.Industry-Leading Productivity: Ovintiv is not just another oil and gas company, it has consistently proven that the company can do more with less. The company set records in third-quarter 2024 for drilling efficiency in key plays like the Permian Basin and Montney. For example, in the Permian, OVV achieved a drilling speed of more than 2,170 feet per day, which is not just a technical milestone but a cost-saving breakthrough. Investors looking for operational efficiency and a company that leads the pack in innovation should find OVV appealing.Steady Shareholder Returns: OVV has consistently returned capital to its shareholders, a rarity in the volatile energy sector. The company returned $240 million in the third quarter alone through base dividends and buybacks. OVV is on track to return 50% of its free cash flow after base dividends to investors annually. In three years, this has amounted to $2.7 billion, showing a shareholder-focused approach that provides steady income even in a cyclical industry.Image Source: Ovintiv Inc.Diversified Operations: OVV is not putting all its eggs in one basket. Its operations span four top-tier regions - Permian, Montney, Anadarko and Uinta. Each brings unique strengths, from the oil-rich Permian to the gas-heavy Montney, ensuring the company can pivot to whichever commodity offers the best returns. This diversified portfolio protects against regional risks and market fluctuations.Disciplined Capital Allocation: OVV has shown that it knows where to spend money and where to cut corners. The company’s capital spending for the year is tightly controlled at $2.3 billion, even as it raises production guidance. In other words, the company isn’t throwing money at growth for growth’s sake. Instead, it has been achieving operational and financial improvements while staying within budget. This kind of discipline speaks volumes about the quality of OVV’s management and its commitment to delivering shareholder value.OVV presents a compelling case for investors with its strong operational efficiency, robust free cash flow and disciplined capital allocation strategy. However, as with any investment, the company’s future performance comes with risks. As illustrated in the chart below, OVV’s share price has underperformed year to date compared with the broader oil and energy sector, as well as key subindustry peers like CNX Resources CNX, Amplify Energy AMPY and Antero Resources AR.Image Source: Zacks Investment Research Cautionary Factors of Ovintiv’s SharesLong-Term Debt Overhang: Despite Ovintiv's efforts to reduce its debt, the company still faces $600 million in near-term maturities. Its ability to meet these obligations hinges on sustaining strong cash flow. A downturn in market conditions could complicate debt repayment and disrupt capital allocation plans.Commodity-Price Sensitivity: Ovintiv's financial performance is heavily dependent on oil and gas prices, which have been volatile. Despite the company's strong operational performance, lower commodity prices in the future can impact its cash flow, profitability and ability to meet OVV’s capital and production guidance.Dependence on Commodity Prices for Revenues: Like most energy companies, OVV’s performance is tied to the prices of oil, gas and natural gas liquids. While the company’s hedging strategy provides some protection, realized natural gas prices in third-quarter 2024 were just $1.88 per thousand cubic feet (Mcf), well below NYMEX levels. This dependence on external price movements introduces volatility into OVV’s earnings, which might concern risk-averse investors.Persistently High-Transportation Costs: Although Ovintiv excels in drilling efficiency, its upstream transportation and processing costs are significant, averaging $7.31 per barrel of oil equivalent (BOE) in the third quarter. These costs can weigh heavily on margins, especially during periods of weak commodity pricing. For investors, this could mean lower-than-expected profits despite strong production numbers.Potential for Overdependence on U.S. Operations:  Ovintiv’s operations are heavily focused in North America, especially on the U.S. Permian Basin and Canada’s Montney region. While these areas are performing well now, this heavy reliance on one part of the world exposes the company to risks like pipeline issues, infrastructure problems and political changes. Any major disruptions in these regions could have a big impact on OVV’s overall performance. Final Thoughts for OVV StockOvintiv has strong financials, with solid free cash flow and efficient operations, making it an attractive option for investors. The company’s diverse assets and focus on returning capital to its shareholders are positive signs. However, there are risks, including volatility in commodity prices, ongoing debt and high transportation costs. Investors should consider the company's strengths alongside the potential challenges in the market. Given the uncertainties, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.7 Best Stocks for the Next 30 DaysJust released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.1% per year. So be sure to give these hand picked 7 your immediate attention. See them now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report CNX Resources Corporation. (CNX): Free Stock Analysis Report Antero Resources Corporation (AR): Free Stock Analysis Report Amplify Energy Corp. (AMPY): Free Stock Analysis Report Ovintiv Inc. (OVV): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks