Ovintiv announced it has entered into a definitive purchase agreement to acquire substantially all leasehold interest and related 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. in a cash and stock transaction valued at approximately $4.275 billion.
Upon the closing of the deals, the acquisition will add approximately 1,050 net 10,000-foot well locations to Ovintiv’s Permian inventory and about 65,000 net acres in the core of the Midland Basin, strategically located near Ovintiv’s current Permian operations. The transaction has been unanimously approved by Ovintiv’s Board of Directors.
Under the terms of the deal, the NMB sellers will receive about 32.6 million shares of Ovintiv common stock and $3.125 billion of cash. This 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, totaling about $825 million, as well as borrowings under the company’s credit facility and/or proceeds from new debt financing. Plus Ovintiv has received fully committed bridge financing from Goldman Sachs Bank USA and Morgan Stanley.
Ovintiv is going to remain 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. And at March 30, 2023 strip pricing, the company expects the transactions to drive more than 25% higher cash returns per share over the next 12 months following the close of the transactions and more than 40% higher cash returns per share in 2024.
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. And the Midland Basin transaction was attractively valued at approximately 2.8 times NTM Adjusted EBITDA and 19% NTM Non-GAAP Free Cash Flow Yield.
The Midland Basin transaction is going to significantly expand Ovintiv’s premium Permian inventory, adding approximately 1,050 net 10,000-foot locations, including about 800 premium return locations and approximately 250 high-potential upside locations. And Ovintiv’s land position in the Permian is expected to increase to approximately 179,000 net acres; 97% of the acquired acreage is held by production with an average operated working interest of 82%. At the 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.
Ovintiv is expecting the transaction will enhance its go-forward oil and condensate capital efficiency by approximately 15%. And the company also expects to achieve a 3 to 5 percent reduction in both operating expenses and transportation and processing expenses per BOE. Following the transactions, Ovintiv’s portfolio will be focused on four premier North American basins each with more than 125,000 net acres of land.
Ovintiv’s leverage metrics are expected to remain strong. At the closing, the company’s leverage ratio is expected to be approximately 1.4 times Debt to Adjusted EBITDA, based on a 12-month projected Adjusted EBITDA at March 30, 2023 strip. Going forward, Ovintiv is going to steward toward a 1.0 times leverage ratio and $4.0 billion of total debt. Plus Ovintiv remains committed to an investment grade balance sheet and expects the rating agencies to affirm its investment grade rating.
Ovintiv also announced 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. And Ovintiv’s landholdings in the play totaled 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).
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. And 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.
“We are acquiring a unique undeveloped asset in the Northern Midland Basin. 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.”
“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.”
— Ovintiv President and CEO Brendan McCracken
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