Ovintiv Snaps Up Midland Basin Inventory, Acreage in $4.2-Billion Cash-Stock Deal
The Denver-based company bulks up its Permian position with the purchase of three EnCap Investment portfolio companies.
Permian Basin shale producer Ovintiv is set to expand its operational footprint in the region with its acquisition of three private-equity backed operators for $4.275 billion in cash and stock.
Ovintiv said on 3 April the deal will add about 1,050 net 10,000-ft well locations, of which about 800 are premium return locations and about 250 high potential upside locations, to its Permian inventory.
Additionally, the deal includes about 65,000 net acres in the core of the Midland Basin, located near Ovintiv's current Permian operations. The acreage is described as largely undeveloped resource in Andrews and Martin counties in Texas.
The assets are currently owned by three companies—Black Swan Oil & Gas, Piedra Resources, and PetroLegacy II—held by EnCap Investments.
“We are acquiring a unique undeveloped asset in the Northern Midland Basin,” said Brendan McCracken, Ovintiv president and chief executive. “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,” he said.
The company said that with the closing of the transaction, expected at the end of the second quarter, that its position in the Permian Basin is expected to increase to about 179,000 net acres; 97% of the acquired acreage is held by production with an average operated working interest of 82%.
This is Ovintiv’s largest acquisition since 2018 when it purchased Newfield Exploration for $7.7 billion.
To help finance the purchase, the Denver-based producer is selling all its Williston Basin Bakken assets located in North Dakota to Grayson Mill Bakken, a portfolio company of funds also managed by EnCap, for about $825 million.
Under the terms of the agreement—which was unanimously approved by Ovintiv’s board of directors—the company will offer 32.6 million common shares and pay $3.13 billion in cash, a portion of which will come from the sale of its Bakken assets.
Changing the Narrative
The deal addresses what Andrew Dittmar, director at Enverus Intelligence Research, sees as one of the more significant concerns with Ovintiv: its relatively short runway of core locations in its portfolio.
“With the $4.275-billion purchase of three EnCap-backed E&Ps in the northern Midland Basin—PetroLegacy, Black Swan, and Piedra—Ovintiv is changing the narrative around the company by materially boosting corporate inventory life,” he said, adding that the acquisition adds several years of additional core drilling inventory to the company’s profile at its planned drilling pace.
"Since investors are closely scrutinizing inventory life when valuing oil-focused E&Ps, adding the additional locations should help the company improve its equity multiple and rerate higher," he said.
Dittmar said that at a bit over $20,000/acre after adjusting for production value, the price on the new assets reflects an increasingly competitive market for core deals, particularly in the Permian.
“The cost of high-quality acreage and drilling inventory has escalated substantially over the last year as public companies targeted acquisitions that could boost their runway and the number of opportunities remaining dwindled,” he said. “While the sales price is a number that should make PE backer EnCap smile, it still works out well for Ovintiv. While located towards the northern edge of the Midland Basin, the three companies still represented some of the highest-quality remaining private-equity-backed opportunities in the Midland Basin and the inventory is competitive with Ovintiv’s existing core drilling locations.”
Last year, more than $30 billion of private companies and assets sold to public buyers, making up about 60% of total upstream M&A, he said, noting that it is a trend that will almost certainly continue and potentially escalate this year as the remaining public companies that lack inventory scramble to roll up the remaining opportunities.
“Companies will also likely need to push further towards the edges of the plays to find targets. Given these dynamics, for the public companies that need locations, and multiple public E&Ps do, it would be smart to make an acquisition sooner rather than later,” he said.