Issue #50: A stable, growing semiconductor maker and a US/Canadian oil and gas play for war-driven energy prices

Texas Instruments Inc. ($TXN) is a global semiconductor producer that dominates its niche and offers a combination of tech growth and blue-chip stability.

Ovintiv Inc. ($OVV) is an oil and gas producer with a large portfolio of producing assets in the US and Canada. It’s set to generate continued high revenues and profits as the Russia-Ukraine war and tension in the Middle East push oil prices up. 

Texas Instruments Inc. ($TXN)



  • Share price at the time of writing: $172.75
  • $TXN is a leading global semiconductor company. 
  • $TXN sells 80,000 products to over 100,000 customers, providing the basic building blocks for a huge range of devices and processes.
  • The Company has extremely strong margins and a solid growth rate and has raised its dividend every year for 128 consecutive years.
  • $TXN stock has slumped 13% since Sept. 2021 in a general retreat for tech stocks.

What they do:

Texas Instruments manufactures a wide range of semiconductors, which they sell to electronics manufacturers and designers around the world. The Company is based in Dallas, Texas, and has design, manufacturing, or sales operations in 30 countries. Texas Instruments was founded in 1930.

$TXN operates in three reportable segments.

  • Analog Processors convert real-world signals like pressure, sound, temperature, or images to digital signals. They are used for power management, signal chain management, human interfaces, and many other functions.
  • Embedded Processors are the digital “brains” in a huge range of devices, in industrial, automotive, and electronics products, among others.
  • Other products include calculators, high-definition image projection products, and custom semiconductors.

Analog processors brought in $74 billion and Embedded processors $22 billion in revenues in FY2021. The “Other” category added $1.25 billion in sales.

These products are sold to customers around the world in a range of different industries.

Source: Texas Instruments

Texas Instruments products are used in dozens of sectors and thousands of products within these broad categories.

$TXN operates manufacturing units in North America, Asia, Japan, and Europe. Most manufacturing is done in-house, insulating the Company against manufacturing backlogs at contract manufacturers.

Texas Instruments pioneered the use of 300mm silicon wafers, which provide cost savings of up to 40% over the 200mm wafer manufacturing process used by most competitors.

What we learned from social media patterns:

Given the size of $TXN and its dominant competitive position, it’s inevitable that there will be some discussion of the Company on social media. We see a steady low level of mentions, with a spike around the release of quarterly and annual results.

In the case of $TXN the number of mentions is less interesting than its competitors. Discussion of the Company is primarily found in threads discussing dividend-bearing stocks or the semiconductor industry in general. We have to go back close to a year to find a thread dedicated to Texas Instruments, and there are very few comments.

$TXN is in a category we’d call “boring tech”. It’s certainly a tech company, and its products are ubiquitous, if generally invisible, but it doesn’t have novelty or the excitement associated with viral tech firms. Everybody uses analog semiconductors but nobody gets excited about them.

We expect $TXN to continue to trade on the basis of financial fundamentals and its appeal as a highly stable investment, rather than on social media trends.

???? Smart Money Signal: Jim Simons of Renaissance Technologies purchased 143,000 shares of $TXN in 2021.

Why $TXN could be valuable:

Global semiconductor sales are expected to grow 11% in 2022 and maintain a CAGR of 8.6% through 2028.

Analog semiconductor sales growth is particularly robust:

Analog Semiconductor Sales. Source: Statista

Texas Instruments is the dominant global supplier of analog semiconductors:

Source: IC Insights

While the term “analog” is often perceived as being something from the past, analog circuits are used in virtually all electronic devices and a huge number of other applications, creating an extremely diverse market for Texas Instruments products. 

$TXN sells 80,000 different products to over 100,000 different customers across an extraordinarily wide range of industries, insulating the Company against adverse events in any specific industry or market.

Texas Instruments does most of its manufacturing in its own facilities, protecting the Company against the chip shortage that has affected many producers that rely on outsourced manufacturing. $TXN is well-positioned to benefit from the current shortage of microprocessors.

$TXN’s size and high profitability allow the company to devote large sums to R&D spending, maintaining a continuous flow of new products and new technologies. The Company has averaged around $1.5 billion per year in R&D spending for the last 5 years. Few competitors are able to match this.

$TXN has extremely strong financial figures, with an operating margin of 49.18% and ROE at 69%. The Company has more cash than debt and its most recent quarter showed year-over-year revenue growth at 18.5% and earnings growth at 26.7%.

The Company’s very high margins and product diversity create a strong competitive moat. If $TXN faces competition in any specific product category they have room to lower their price and sustain market share with minimal impact on overall profits.

Texas Instruments pays significant dividends, with the trailing annual dividend yield at 2.42%. The dividend has increased every year for 18 consecutive years, and the payout ratio is sustainable at just over 50%.

$TXN has beaten analyst earnings estimates for 4 consecutive quarters. The consensus rating of the 32 analysts covering the stock is between “Buy” and “Hold”, with an average price target of $198.07, 14% above the current level.

The stock price has slumped 14% since Oct 2021 amid a general market retreat and a particular weakness in tech stocks. This decline appears to be driven by overall market weakness rather than any perceived issues with the Company.

What the risks are:

1️⃣ The semiconductor market is competitive. $TXN currently enjoys a dominant competitive position in key portions of the industry, but competition is intense and the Company must upgrade continuously to stay ahead.

2️⃣ High international exposure. 90% of TXN revenue comes from shipments to locations outside the US. 25% of sales are to customers in China. Trade disruptions, sanctions, or tariffs could have a significant impact on results. 

3️⃣ $TXN has an extensive intellectual property portfolio. Breaches of patents or intellectual property rights could compromise the Company’s competitive position. $TXN operates worldwide and protection for intellectual property rights is not strong in some parts of the world.

Bottom line: $TXN is a tech company with the fundamentals, balance sheet, and dividend of a blue-chip industrial firm. The Company combines the growth potential of a tech company with blue-chip security and is positioned as both a defensive play and a growth play.

Ovintiv Inc. ($OVV)



  • Share price at the time of writing: $45.93
  • Ovintiv is a producer of oil and natural gas with operations in multiple producing regions in the US and Canada. 
  • $OVV is a leader in innovative drilling and extraction technologies, allowing efficient extraction of oil and natural gas.
  • Ovintiv is positioned to benefit from the high energy price environment and the move toward the use of US resources rather than those from politically unstable regions.
  • Ovintiv has used the cash windfall from the post-pandemic oil/gas price surge to focus on paying down debt and building a strong financial position.

What they do:

Ovintiv Inc was formerly known as EnCana, and was at one point Canada's largest corporation. The Company moved its headquarters to the US and changed its name to Ovintiv in January 2020.

Ovintiv finds, extracts, and sells oil, natural gas, and natural gas liquids in the United States and Canada. The Company maintains operations in several major energy-producing regions in the US and Canada.

Ovintiv Production Locations, source: Ovintiv Inc.

US operations consisted (in 2020) of close to 6000 wells, primarily in the Permian, Anadarko, and Uinta basins.

Canadian operations consist (in 2020) of 2,340 wells, primarily in the Montney Basin in Alberta.

Ovinitiv controls proven reserves of 592 million barrels of oil, 580.5 million barrels of natural gas liquids, and 4,918 billion cubic feet of natural gas. 44% of these reserves remain undeveloped.

$OVV sells its output to refiners, distributors, energy marketing companies, and aggregators. Marketing activities are controlled by the Company’s Midstream, Marketing, and Fundamentals division.

Ovintiv has a strong environmental compliance record and has successfully avoided issues with environmental regulators.

What we learned from social media patterns:

The chart of Ovintiv’s mentions on social media seems to show a pattern of escalating interest. But a jump from no mentions to 7 in a week suggests it still is a long way from becoming a household name.

Most mentions are in the context of general discussion threads or threads discussing oil plays across the board, and the posts have limited information and draw limited attention. One detailed post discussing Michael Burry’s position in $OVV appeared six months ago but drew little attention.

This pattern is not surprising. Oil is an industry retail investors love to hate, and even in an oil price boom, it doesn’t elicit the attention that goes to more emotionally appealing industries.

Smart Money Signal: ???? Steven Cohen of Point72 Asset Management purchased 2 million shares of $OVV in Q4 2021.

Why $OVV could be valuable:

The scale of Russia’s war on Ukraine has forced a complete revision of oil and gas price forecasts. The prospect of long-term sanctions on Russia and continued instability in the Middle East places a high premium on proven reserves in politically stable areas.

This chart illustrates the degree of uncertainty now prevailing in energy price forecasting:

Source: US Energy Information Agency

Note the upper and lower bounds of the price confidence range: the lower band is now below $40 with the upper band at $180. This is an extraordinarily wide range that demonstrates the difficulty of oil price forecasting in an environment where political constraints are the main variable.

$OVV has based their 2022 outlook on a projected average price of $85/bbl for oil. Prices have in fact held well above that level with no indication of an impending decline.The Short-Term Energy Outlook (STEO) forecast of the USEIA is substantially above this level, as seen in the chart above.

Ovintiv produced a stellar year in 2021. Comparisons to the COVID-affected prior year have limited relevance, but the figures remain:

  • Full year net earnings of $1.4 billion.
  • Reduced net debt by $2.3 billion.
  • Bought back 4.3 million shares
  • A 43% dividend increase to $0.80 per share per quarter
  • Posted a 50% reduction in methane emissions, over the 33% target.

Assuming an average oil price of $85 per barrel $OVV is set to reach its debt target in the second half of 2022, ending a period of serious debt issues left over from the period of low oil prices in 2019 and 2020.

$OVV average production was over 500,000 barrels per day of oil in 2021 and planned capital expenditure of $1.5 billion in 2022 is expected to add another 180,000 to 190,000 barrels per day and roughly $2.9 billion in free cash flow. 

$OVV shares took an enormous hit as oil prices sagged from late 2018 through 2020. Shares sagged from over $65 in September 2018 to only $2.60 in March 2020, losing a staggering 96% of their value. They’ve since recovered substantially but starting from such a low base still leaves them potentially undervalued. One analysis concludes that $OVV’s intrinsic value is potentially 70% above its February 15 price of roughly $46.

$OVV trades at a trailing P/E of only 3.13 and 1.6 times trailing 12-month sales. 27 analysts covering the stock give a consensus “Buy” recommendation with an average price target of $52.92, 15% above the current level.

What the risks are:

1️⃣  All $OVV projections are based on an average 2022 oil price of $85/bbl. An early resolution to the Russia/Ukraine conflict, lifting of sanctions on Iran, or other combinations of geopolitical events could make these projections useless.

2️⃣  $OVV still carries considerable debt. The Company has moved aggressively to deleverage its balance sheet but if oil prices fail to sustain high levels this may no longer be possible.

3️⃣  Ovintiv’s oil and gas reserves are primarily in shale basins exploited by hydraulic fracturing, or “fracking”. There has been concern over the impact of fracking on the environment and on groundwater resources. Increased regulations or negative research findings on the consequences of fracking could have a material impact on the stock’s performance.

Bottom line:  $OVV is largely a play on the expectation of continued high oil prices and continued instability and geopolitical tension involving Russia and other key oil products. These expectations offer enormous opportunities for oil and gas producers in stable environments, including $OVV.

That's a wrap!

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