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Bear of the Day: Ovintiv Inc. (OVV)

Ovintiv OVV is engaged in the exploration, development, production, and marketing of natural gas and oil. The company is an independent energy producer whose principal assets reside in the Permian Basin in Texas and as well as the Anadarko Basin in Oklahoma. Formerly known as Encana Corporation, the company changed its name in January of 2020 and is shifted its headquarters to Denver, CO.

The Zacks Rundown

OVV, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Oil and Gas – Exploration and Production – Canadian industry group, which ranks in the bottom 8% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months. We can see that this group has underperformed to start off the new year:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

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Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poor-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.

After moving higher for much of the last two years, many energy companies have lost traction amid the commodity price drops in oil and natural gas. Several companies have even shifted to new downtrends, and OVV appears to be on the precipice of a reversal after a long sideways move. The share price has made a series of lower lows recently and represents a compelling short opportunity as the energy sector has now taken a backseat.

Recent Earnings Misses and Deteriorating Outlook

OVV has fallen short of estimates in three of the last four quarters. The energy company most recently reported Q3 earnings back in November of $1.44/share, missing the $1.98/share consensus estimate by -27%. The stock has moved steadily lower since the announcement.

OVV has posted a trailing four-quarter average earnings miss of -17.29%. Consistently falling short of earnings estimates is a recipe for underperformance, and OVV is no exception.

Ovintiv has been on the receiving end of negative earnings estimate revisions as of late. For the current fiscal year, analysts have revised their EPS estimates downward by -27.25% in the past 60 days. The 2023 Zacks Consensus Estimates is now $10.68/share. Falling earnings estimates are a huge red flag and need to be respected.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Technical Outlook

As illustrated below, OVV has been in a sideways chop for much of the last year. Notice how the stock has plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. The stock is making a series of lower lows, with no respite from the selling in sight. Also note how both moving averages have rolled over and are sloping down – another good sign for the bears.

StockCharts
StockCharts


Image Source: StockCharts

While not the most accurate indicator, OVV is likely to experience what is known as a “death cross”, wherein the stock’s 50-day moving average crosses below its 200-day moving average. OVV would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen nearly 7% this year while the general market has staged a new uptrend.

Final Thoughts

A deteriorating fundamental and technical backdrop show that this stock is unlikely to make new highs anytime soon. The fact that OVV is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Our Zacks Style Scores depict a weakening outlook for this stock, as OVV is rated a second-worst possible ‘D’ in our Momentum category. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of an underperforming OVV until the situation shows major signs of improvement.

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Zacks Investment Research