Ovintiv Inc. (NYSE: OVV) announced Monday an agreement to acquire “core Midland Basin assets,” which it says expands premium Permian inventory and improves shareholder returns.
In a statement posted on its site, the company disclosed that it has entered into a definitive purchase agreement to acquire all of the leasehold interests and related assets of Black Swan Oil & Gas, PetroLegacy Energy and Piedra Resources (the sellers of NMB) in cash and shares. transaction valued at approximately $4.275 billion.
The businesses are fund portfolio companies managed by EnCap Investments LP, Ovintiv said in the statement. Under the terms of the deal, the sellers of NMB will receive approximately 32.6 million shares of Ovintiv common stock and $3.125 billion in cash, the company said.
Ovintiv said 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 at Grayson Mill Bakken, LLC, for a total of approximately $825 million, which was also announced Monday, as well as borrowings under the company’s credit facility and/or the proceeds of new debt financing.
Ovintiv disclosed that it has received fully committed bridge financing from Goldman Sachs Bank USA and Morgan Stanley.
Upon closing, the deal 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 near the current operations of Ovintiv in the Permian, the company said. The transaction has been unanimously approved by Ovintiv’s board of directors, Ovintiv said.
In the statement, Ovintiv said it remains committed to its capital allocation framework that returns at least 50 percent of post-dividend non-GAAP free cash flow to shareholders through buybacks and/or variable dividends. The company stated that on March 30, 2023, the price of the band, it expects the transactions to be more than 25 percent higher in cash returns per share over the next twelve months after the transactions close and cash returns per share more than 40 percent higher. in 2024.
“We are acquiring a unique undeveloped asset in the Northern Midland Basin,” Ovintiv President and CEO Brendan McCracken said in a company statement.
“Located in some of the best rock in the Permian, these assets have demonstrated strong performance and are a natural fit with our existing acreage in Martin County. The acquisition ticks all the boxes of our disciplined sustainable returns strategy: it will immediate and long-term positive across all key financial metrics, the acreage is in an area where we have a competitive operating advantage and will significantly increase our premium Permian well inventory,” he added.
“This will expand free cash flow per share and enhance our ability to deliver sustainable returns to our shareholders. We are confident that, given our operational efficiency, culture of innovation and experience and scale in the Permian Basin, Ovintiv is best positioned to turn this high-quality resource into great value for our shareholders,” McCracken continued.
In addition to its acquisition announcement, Ovintiv disclosed on Monday that it had entered into a definitive agreement to sell all of its Bakken assets located in North Dakota’s Williston Basin to Grayson Mill Bakken, LLC, for a total of cash proceeds of approximately $825 million. Ovintiv’s land holdings in the play totaled 46,000 net acres as of Dec. 31, 2022, and first-quarter Bakken production is expected to average approximately 37,000 barrels of oil equivalent per day, it said. explain the company
“The sale of our Bakken asset is aligned with our track record of realizing significant value in non-core assets, while valuing our portfolio and expanding the inventory runway in our core areas,” McCracken said .
“We are grateful for the hard work of our Bakken team and delighted to receive the full value of the asset,” he added.
Following the transactions, Ovintiv said its portfolio will focus on four major North American basins, each with more than 125,000 net acres of land.
The effective date for the acquisition of the Midland Basin assets and the Bakken disposition is Jan. 1, 2023, Ovintiv noted. 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 said.
Change the narrative
With the $4.275 billion purchase of three EnCap-backed E&Ps in the North Midland Basin: PetroLegacy, Black Swan and Piedra, Ovintiv is changing the company’s narrative by materially increasing the life of corporate inventory.
That’s what Andrew Dittmar, director of Enverus Intelligence Research, said in a statement sent to Rigzone commenting on Ovintiv’s latest deal.
“This addresses one of Ovintiv’s biggest concerns, which was the relatively short runway of its core portfolio locations,” Dittmar said in the statement.
“The three EnCap companies have around 700 net locations across their 65,000 net acres in the Midland Basin, adding several years of additional core drilling inventory to the company’s profile at the expected drilling rate. Given that the investors are closely monitoring inventory life when valuing oil-focused E&Ps, adding additional locations should help the company improve its equity multiple and revalue further,” he added.
“There’s also a bit of luck in the timing of the deal, with Ovintiv announcing its big acquisition on Monday after OPEC surprised crude markets with a production cut over the weekend. The acquisition is Ovintiv’s largest since the company bought Newfield Exploration for $7.7 billion in 2018,” continued Dittmar.
At just over $20,000/acre after adjusting for production value, the new asset price reflects an increasingly competitive market for core deals, particularly in the Permian, Dittmar noted in the statement.
“The cost of high-quality acreage and drilling inventory has increased substantially over the past year as public companies targeted acquisitions that could increase their footprint and the number of remaining opportunities dwindled.” , he said.
“While the sale price is a number that should make PE backer EnCap smile, it still works out well for Ovintiv. Despite being in the northern end of the Midland Basin, the three companies still represented some of the highest quality private equity opportunities remaining in the Midland Basin and the inventory is competitive with Ovintiv’s existing core drilling locations,” he added.
In the statement, Dittmar noted that last year, more than $30 billion of private companies and assets were sold to public buyers, “representing about 60 percent of total upstream M&A.”
“This trend is certain to continue and potentially increase this year as remaining public companies that are short of inventory scramble to accumulate remaining opportunities,” he said.
“Companies will also need to push more toward the fringes of plays to find targets. Given these dynamics, for public companies that need locations and for multiple public E&Ps, it would be smart to make an acquisition sooner rather than later. late,” Dittmar added.
“In combination with the addition of core assets, buyers of public companies are also likely to seek a high degree of their portfolios by selling what they consider non-core. That is at stake in this deal, as Ovintiv will also divest its Williston Basin holdings to Grayson Mill, another EnCap portfolio company, for $825 million,” he continued.
Dittmar said the sale will help Ovintiv pay off the cash portion of the deal and keep debt under control, which he noted was a key concern as interest rates rise.
“The Williston assets appear to have been sold for current production value only, without Grayson Mill having to pay for acreage or inventory,” he said.
“Private companies have generally targeted these lower-cost offers, and this complements an attractive purchase that Grayson Mill made of Equinor in early 2021 for $900 million,” he added.
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