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IG, but not for long

21 September 2020 by jbchevrel

Ovintiv, Inc. (OVV) is in IGs since s28 included. OVV produces and develops multi-basin portfolio of Oil, NGL and Natural Gas. Today OVV 5y CDS was wider by +32bp, making it the worst performers in the brand new CDX IG s35 vintage. Beyond the fact that front end contracts on crude and Nat Gas were down by -5% and -10% respectively, OVV under performed also because it was downgraded to 'BB+' from 'BBB-', by Fitch Ratings on Friday night. The rating agency has maintained the Negative Outlook. The main drivers for this downgrade included OVV’s above-average refinancing risk ($1.25B 22s, with another $1.25B drawn on the revolver), the risk that revolver borrowings could rise further if low oil prices limit the attractiveness of tapping the bond market in the near term, improving, but still below average netbacks, and lower expected production growth over the next few years given capex reductions. Liquidity remains ample and debt maturities are concentrated between Nov21 and Jan22, so OVV really looks fine for 2020. Also they have hedges against further weakness in underlying commodities, but in the medium term, as the hedges roll off, and if the energy outlook is still grim, OVV credit may become more vulnerable. Elsewhere, it was a decently risk-off session. Reasons probably include (1) delays to additional fiscal-stimulus packages (2) heated US election campaign season (3) continuing tensions with China (4) Last But Not Least: credible threat of renewed lockdowns in many places because of higher coronavirus infections. The US is closing in on 200k coronavirus deaths, and former FDA commissioner Scott Gottlieb has warned of at least one more cycle of the virus heading into the fall and winter.