- Acquiring approximately 65,000 net acres of largely undeveloped resource in Martin and Andrews Counties, highly complementary with Ovintiv’s existing Permian Basin position
- Valued at approximately 2.8 times next twelve months (“NTM”) Adjusted EBITDA with a 19% NTM Non-GAAP Free Cash Flow Yield at current commodity strip pricing
- Adds approximately 1,050 net well locations, including approximately 800 premium(1) return well locations and approximately 250 high potential upside locations
- Immediately accretive to Non-GAAP Cash Flow per share, Non-GAAP Free Cash Flow per share, net asset value per share and shareholder returns at current commodity strip pricing
- Increases NTM cash returns per share by more than 25% and 2024 cash returns per share by more than 40%
- Agreement reached to divest entirety of Bakken assets for proceeds of approximately $825 million
- At closing, the Company’s leverage ratio is expected to be approximately 1.4 times Debt to Adjusted EBITDA, based on twelve month projected Adjusted EBITDA at March 30, 2023 strip prices
- Ovintiv will steward towards a 1.0 times leverage ratio and $4.0 billion of total debt
- Ovintiv remains committed to an investment grade balance sheet and expects the ratings agencies to affirm its investment grade rating
- 20% per share increase to base dividend announced, effective for the June 2023 record date
- Strong first quarter production exceeds Company guidance with total volumes of approximately 510 thousand barrels of oil equivalent per day (“MBOE/d”), including approximately 165 thousand barrels per day (“Mbbls/d”) of oil and condensate; expected first quarter capital of $610 to $620 million
1) |
Premium return well locations defined as generating a greater than 35% internal rate of return at $55/bbl WTI oil and $2.75/MMBtu NYMEX natural gas prices. |
DENVER – Ovintiv Inc. (NYSE: OVV) (TSX: OVV) (“Ovintiv” or the “Company”) today announced it has entered into a definitive purchase agreement to acquire substantially all leasehold interest and related assets (the “assets”) of Black Swan Oil & Gas, PetroLegacy Energy and Piedra Resources (“NMB sellers”), which are portfolio companies of funds managed by EnCap Investments L.P. (“EnCap”), in a cash and stock transaction valued at approximately $4.275 billion. Upon closing, the acquisition will add approximately 1,050 net 10,000 foot well locations to Ovintiv’s Permian inventory and approximately 65,000 net acres in the core of the Midland Basin, strategically located in close proximity to Ovintiv’s current Permian operations. The transaction has been unanimously approved by Ovintiv’s Board of Directors.
Under the terms of the agreement, the NMB sellers will receive approximately 32.6 million shares of Ovintiv common stock and $3.125 billion of cash. The cash portion of the transaction is expected to be funded through a combination of cash on hand, cash proceeds received from the Company’s pending sale of its Bakken assets located in North Dakota to Grayson Mill Bakken, LLC, a portfolio company of funds managed by EnCap, totalling approximately $825 million, as well as borrowings under the Company’s credit facility and/or proceeds from new debt financing. Ovintiv has received fully committed bridge financing from Goldman Sachs Bank USA and Morgan Stanley.
Ovintiv remains committed to its capital allocation framework which returns at least 50% of post base dividend Non-GAAP Free Cash Flow to shareholders through buybacks and/or variable dividends. At March 30, 2023 strip pricing, the Company expects the transactions to drive more than 25% higher cash returns per share over the next twelve months following the close of the transactions and more than 40% higher cash returns per share in 2024.
“We are acquiring a unique undeveloped asset in the Northern Midland Basin,” said Ovintiv President and CEO, Brendan McCracken. “Located in some of the best rock in the Permian, these assets have demonstrated leading well performance and are a natural fit with our existing Martin County acreage. The acquisition checks all the boxes on our disciplined durable returns strategy – it will be immediately and long-term accretive across all key financial metrics, the acreage is in an area where we have a competitive operating advantage, and it significantly increases our premium Permian well inventory. This will expand free cash flow per share and enhance our ability to deliver durable returns to our shareholders. We are confident that – given our operational efficiency, culture of innovation, and expertise and scale in the Permian Basin – Ovintiv is best positioned to convert this high-quality resource into tremendous value for our shareholders.”
Combined Transaction Overview:
- Immediately Accretive – The combined transactions are expected to be immediately accretive across key per share operational and financial metrics including Non-GAAP Cash Flow per share, Non-GAAP Free Cash Flow per share, net asset value per share and shareholder returns. The Midland Basin transaction was attractively valued at approximately 2.8 times NTM Adjusted EBITDA and 19% NTM Non-GAAP Free Cash Flow Yield.
- Extends Permian Scale and Inventory Life – The Midland Basin transaction will significantly expand Ovintiv’s premium Permian inventory, adding approximately 1,050 net 10,000 foot locations, including approximately 800 premium return locations and approximately 250 high potential upside locations. Ovintiv’s land position in the Permian is expected to increase to approximately 179 thousand net acres; 97% of the acquired acreage is held by production with an average operated working interest of 82%. At closing, the Company’s pro forma Permian oil and condensate production is expected to nearly double to approximately 125 Mbbls/d. The Company expects to realize significant well cost savings across its combined Permian assets resulting from optimized operations and economies of scale.
- Enhances Capital Efficiency and Margins – Ovintiv expects the transaction will enhance its go forward oil and condensate capital efficiency by approximately 15%. The Company also expects to achieve a three to five percent reduction in both operating expense and transportation and processing expense per BOE.
- Streamlines Portfolio and Operations – Following the transactions, Ovintiv’s portfolio will be focused in four premier North American basins each with more than 125,000 net acres of land.
- Maintains Strong Balance Sheet – Ovintiv’s leverage metrics are expected to remain strong. At closing, the Company’s leverage ratio is expected to be approximately 1.4 times Debt to Adjusted EBITDA, based on twelve month projected Adjusted EBITDA at March 30, 2023 strip. Going forward, Ovintiv will steward towards a 1.0 times leverage ratio and $4.0 billion of total debt. Ovintiv remains committed to an investment grade balance sheet and expects the ratings agencies to affirm its investment grade rating.
Refer to Note 1 for information regarding Non-GAAP Measures in this release.
Pro Forma Permian Position at close:
Ovintiv Standalone |
Pro Forma |
Change |
|
Net Acres (thousands) |
114 |
179 |
+57 % |
Oil & C5+ Production (Mbbls/d) |
65 |
125 |
+92 % |
Total Production (MBOE/d) |
115 |
190 |
+65 % |
% Oil |
55 % |
65 % |
+18 % |
Assumes transaction closes June 30, 2023 |
Bakken Disposition
Ovintiv also announced today that it has entered into a definitive agreement to sell the entirety of its Bakken assets located in the Williston Basin of North Dakota to Grayson Mill Bakken, LLC, a portfolio company of funds managed by EnCap for total cash proceeds of approximately $825 million. Ovintiv’s landholdings in the play totalled 46 thousand net acres as of December 31, 2022. Estimated first quarter Bakken production is expected to average approximately 37 MBOE/d (60% oil and condensate).
McCracken added, “The sale of our Bakken asset is aligned with our track record of unlocking significant value from non-core assets while high grading our portfolio and extending inventory runway in our core areas. We are grateful for the hard work of our Bakken team and pleased to receive full value for the asset.”
Base Dividend Increase
On April 2, 2023, Ovintiv’s Board of Directors declared a quarterly dividend of $0.30 per share of common stock payable on June 30, 2023, to shareholders of record as of June 15, 2023. This represents a 20% increase in the Company’s base dividend payment on an annualized basis. This is the second increase announced by Ovintiv in the last 12 months.
Updated 2023 Guidance:
Ovintiv has updated its 2023 full year guidance assuming a closing date of June 30, 2023 for both transactions.
Original 2023 |
Updated 2023 |
|
Total Production (MBOE/d) |
500 – 525 |
520 – 545 |
Oil & Condensate (Mbbls/d) |
165 – 175 |
185 – 195 |
Other Natural Gas Liquids (“NGLs”) (Mbbls/d) |
80 – 85 |
80 – 85 |
Natural Gas (MMcf/d) |
1,525 – 1,575 |
1,525 – 1,575 |
Capital Investment ($ Millions) |
$2,150 – $2,350 |
$2,600 – $2,900 |
2024 Outlook
The acquired acreage competes for capital immediately. Following the closing of the Midland Basin transaction, Ovintiv plans to moderate drilling activity in the acquired assets, moving from seven operated rigs to two, for a total of five rigs operating across its combined Permian acreage. Ovintiv expects to deliver 2024 total company average oil and condensate production volumes of greater than 200 Mbbls/d with total capital investment of $2.1 billion to $2.5 billion.
First Quarter 2023 Operational Update
Ovintiv continued to deliver strong operational performance through the first quarter with estimated oil and condensate volumes averaging approximately 165 Mbbls/d and estimated total production of approximately 510 MBOE/d, both above Company guidance. Ovintiv expects its first quarter capital to total approximately $610 million to $620 million, toward the low end of Company guidance. Bolt-on acquisition activity continued during the quarter with approximately $200 million of premium oil inventory additions.
Timing and Approvals
The effective date of the acquisition of the Midland Basin assets and the Bakken disposition is January 1, 2023. The transactions, which are expected to close by the end of the second quarter, are subject to the satisfaction of customary closing conditions and customary closing adjustments.
The Company intends to rely on the exemption set forth in Section 602.1 of the TSX Company Manual, which provides that the Toronto Stock Exchange will not apply its standards to certain transactions involving eligible interlisted issuers on a recognized exchange, such as the New York Stock Exchange (“NYSE”), provided that the transaction is completed in compliance with the requirements of such other recognized exchange.
Advisors
Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, and TPH&Co., the energy business of Perella Weinberg Partners are serving as financial advisors to Ovintiv. Gibson, Dunn & Crutcher LLP, Kirkland & Ellis LLP and Blake, Cassels & Graydon LLP are serving as Ovintiv’s legal counsel.
Jefferies LLC is serving as financial advisor to EnCap in connection with the Northern Midland Basin transaction. Vinson & Elkins LLP is serving as EnCap’s legal counsel.
Conference Call Information
A conference call and webcast to discuss the transactions will be held at 6:30 a.m. MT (8:30 a.m. ET) on April 3, 2023.
To join the conference call, please dial 888-664-6383 (toll-free in North America) or 416-764-8650 (international) approximately 15 minutes prior to the call.
The live audio webcast of the conference call, including presentation slides, will be available on Ovintiv’s website, www.ovintiv.com under Investors/Presentations and Events. The webcast will be archived for approximately 90 days.
Important information
Unless otherwise noted, Ovintiv reports in U.S. dollars and production, sales and reserves estimates are reported on an after-royalties basis. Unless otherwise specified or the context otherwise requires, references to Ovintiv or to the Company includes reference to subsidiaries of and partnership interests held by Ovintiv Inc. and its subsidiaries.
NI 51-101 Exemption
The Canadian securities regulatory authorities have issued a decision document (the “Decision”) granting Ovintiv exemptive relief from the requirements contained in Canada’s National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). As a result of the Decision, and provided that certain conditions set out in the Decision are met on an on-going basis, Ovintiv will not be required to comply with the Canadian requirements of NI 51-101 and the Canadian Oil and Gas Evaluation Handbook. The Decision permits Ovintiv to provide disclosure in respect of its oil and gas activities in the form permitted by, and in accordance with, the legal requirements imposed by the U.S. Securities and Exchange Commission (“SEC”), the Securities Act of 1933, the Securities and Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the rules of the NYSE. The Decision also provides that Ovintiv is required to file all such oil and gas disclosures with the Canadian securities regulatory authorities on www.sedar.com as soon as practicable after such disclosure is filed with the SEC.
NOTE 1: Non-GAAP Measures
Certain measures in this news release do not have any standardized meaning as prescribed by U.S. GAAP and, therefore, are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other companies and should not be viewed as a substitute for measures reported under U.S. GAAP. These measures are commonly used in the oil and gas industry and/or by Ovintiv to provide shareholders and potential investors with additional information regarding the Company’s liquidity and its ability to generate funds to finance its operations. For additional information regarding non-GAAP measures, see the Company’s website. This news release contains references to non-GAAP measures as follows:
- Non-GAAP Cash Flow is a non-GAAP measure. Non-GAAP Cash Flow is defined as cash from (used in) operating activities excluding net change in other assets and liabilities, and net change in non-cash working capital. Ovintiv has not provided a reconciliation of Non-GAAP Cash Flow to cash from operating activities, the most comparable financial measure calculated in accordance with GAAP. Cash from operating activities includes certain items which may be significant and difficult to project with a reasonable degree of accuracy. Therefore, cash from operating activities, and a reconciliation of Non-GAAP Cash Flow to cash from operating activities, are not available without unreasonable effort.
- Non-GAAP Free Cash Flow and Non-GAAP Free Cash Flow Yield are non-GAAP measures. Non-GAAP Free Cash Flow is defined as Non-GAAP Cash Flow in excess of capital expenditures, excluding net acquisitions and divestitures. Non-GAAP Free Cash Flow Yield is defined as Annualized Non-GAAP Free Cash Flow compared to the Company’s market capitalization. Ovintiv has not provided a reconciliation of Non-GAAP Free Cash Flow to cash from operating activities or a reconciliation of Non-GAAP Free Cash Flow Yield to annualized net cash from operating activities compared to market capitalization, the most comparable financial measures calculated in accordance with GAAP. Cash from operating activities includes certain items which may be significant and difficult to project with a reasonable degree of accuracy. Therefore, cash from operating activities, and a reconciliation of Non-GAAP Free Cash Flow to cash from operating activities and Non-GAAP Free Cash Flow Yield to annualized cash from operating activities compared to market capitalization, are not available without unreasonable effort.
- Adjusted EBITDA is defined as trailing 12-month net earnings (loss) before income taxes, DD&A, impairments, accretion of asset retirement obligation, interest, unrealized gains/losses on risk management, foreign exchange gains/losses, gains/losses on divestitures and other gains/losses. Ovintiv has not provided a reconciliation of Adjusted EBITDA to net income (loss), the most comparable financial measure calculated in accordance with GAAP. Net income (loss) includes certain items which may be significant and difficult to project with a reasonable degree of accuracy. Therefore, net income (loss), and a reconciliation of Adjusted EBITDA to net income (loss), are not available without unreasonable effort.
- Debt to Adjusted EBITDA is a non-GAAP measure monitored by management as an indicator of the Company’s overall financial strength. Ovintiv has not provided a reconciliation of Debt to Adjusted EBITDA to total debt to net income (loss), the most comparable financial measure calculated in accordance with GAAP. Total debt to net income (loss) includes certain items which may be significant and difficult to project with a reasonable degree of accuracy. Therefore, total debt to net income (loss), and a reconciliation of Debt to Adjusted EBITDA to total debt to net income (loss), are not available without unreasonable effort.
ADVISORY REGARDING OIL AND GAS INFORMATION – The conversion of natural gas volumes to barrels of oil equivalent (“BOE”) is on the basis of six thousand cubic feet to one barrel. BOE is based on a generic energy equivalency conversion method primarily applicable at the burner tip and does not represent economic value equivalency at the wellhead. Readers are cautioned that BOE may be misleading, particularly if used in isolation. The term “liquids” is used to represent oil, NGLs and condensate. The term “condensate” refers to plant condensate.