Ovintiv Doubles Down on Permian Basin With Big Acquisition

Ovintiv (CA:OVV) announced on April 3 that it would acquire 65,000 acres of undeveloped land in the Permian Basin. The transaction will have the company pay $4.3 billion, including the assumption of debt, or approximately 2.8x the next 12 months (NTM) adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

The cash-and-stock deal sees Ovintiv issue 36 million shares and $3.13 billion in cash to asset manager EnCap Investments L.P. for the three companies involved in the sale — Black Swan Oil & Gas, PetroLegacy Energy and Piedra Resources, .

“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.”

Added Assets

The acquisition of these assets adds approximately 1,050 net 10,000-foot locations, 800 generating premium returns and another 250 with tremendous upside potential.

Once completed, Ovintiv will have 179,000 net acres in the Permian Basin, generating 190,000 barrels of oil equivalent per day (MBOE/d), 65% higher than before the acquisition. In addition, of the 190 MBOE/d, 65% will be from oil, up from 55%.

The return generated from the 1,050 wells acquired in this acquisition will generate an internal rate of return of over 35% based on a $55 West Texas Intermediate barrel of oil and an NYMEX natural gas price of $2.75 per million British thermal units (MMBtu).

To pay for the cash portion of the transaction, Ovintiv is selling its North Dakota Bakken assets to Grayson Mill Bakken LLC, a portfolio company managed by EnCap. It will receive $825 million for the assets, which include 46,000 net acres.

In January 2020, the company, formerly Encana, completed its reorganization, including moving its headquarters to the United States, rebranding under the Oventiv name, and completing a 1-for-5 share consolidation.

At one time, Encana was Canada’s largest publicly traded company, valued at more than the Royal Bank of Canada (CA:RY). However, the company was split into two businesses in 2009, with the oil assets sold off to Cenovus (US:CVE). Encana focused on natural gas.

Shale Suffering

Unfortunately, shale oil took over, and the company suffered substantially from the transition. Its shares fell below CAD$4 in March 2020 from a high of around CAD$250 in June 2008. After a successful year, they recovered slightly in 2022 due to higher oil and natural gas prices.

Highlights of this past year include the production of 510 MBOE/d, non-GAAP free cash flow of $2.3 billion, and $1 billion in dividends and share repurchases paid out to shareholders.

With this acquisition, the company moves from being evenly split between natural gas and oil to more of an oil focus. Ovintiv’s debt after the purchase will be 1.4x adjusted EBITDA. It plans to lower that to 1.0x its leverage ratio as soon as possible.

The transaction is expected to close by the end of June.

Invesco Buys

While there is a long list of institutional owners of OVV stock, nearly 1,100 have filed 13D/G or 13F forms with the Securities Exchange Commission (SEC), according to data compiled by Fintel, fund sentiment is below average. With a Fund Sentiment Score of 39.52, the company ranks at 24,605 out of 37,623 stocks tracks.

Big recent purchases by four Invesco funds jump out of the data. A near-one million share buy by Invesco Small Cap Value Fund Class A (US:VSCAX), a 786,600-share buy by Invesco American Value Fund Class A (US:MSAVX), 551,000-share purchase by Invesco Value Opportunities Fund Class A (US:VVOAX), and a 198,535 share buy made by the Invesco DWA Energy Momentum ETF (US:PXI).

This article originally appeared on Fintel

By Will Ashworth