Ovintiv Inc. (OVV) Valuation Update - May 12

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dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Ovintiv Inc. (OVV) Valuation Update - May 12

Post by dan_s »

Ovintiv's Q1 results beat my forecast due to much better realized natural gas prices ($3.80/mcf) than I expected and higher production. The Company is expected to close two significant transactions in June that will increase production by ~38,000 Boepd, with most of the increase being crude oil.

I have updated my forecast/valuation model and it will be posted to the EPG website this afternoon.

OVV is one of the Elite Eight in our Sweet 16 that reported Q1 production of 511,400 Boepd in Q1. Assuming the Midland Basin Acquisition (+75,000 Boepd with 80% oil) and the Bakken Asset sale close in June, the Company's production should move to ~564,000 Boepd in Q4.

At the time of this post, OVV was trading at $32.64, which is just 2.24 X my operating CFPS forecast for 2023. AND my CFPS is lower than the average cash flow forecast shown on TipRanks, which is $14.98.

My valuation increases by $1 to $64/share, primarily due to the better than expected Q1 results.

Since Ovintiv announced Q1 results on May 9th, four respected energy sector analysts have submitted revised price targets to TipRanks of $36, $38, $48 and $63. When an upstream company announces a very significant acquisition, most analysts will be very conservative on their price target revisions until the deal closes. I see little chance of the Midland Basin Acquisition not closing since EnCap is behind the Sellers.
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Details on the two transactions from the Company below:

Midland Basin Acquisition
On April 3, Ovintiv announced it had 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 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, before closing adjustments. 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. < Key to my valuation is the significant "Running Room" this deal gives to Ovintiv.

Under the terms of the agreement, the 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, as well as proceeds from new debt financing and/or borrowings under the Company's credit facility. If required, Ovintiv has received fully committed bridge financing from Goldman Sachs Bank USA and Morgan Stanley to facilitate the transaction.

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 the end of June, the Company's pro forma Permian oil and condensate production is expected to nearly double. The Company expects to realize significant well cost savings across its combined Permian assets resulting from optimized operations and economies of scale.

Bakken Disposition
On April 3, Ovintiv announced that it had 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, before closing adjustments. Ovintiv's landholdings in the play totaled 46 thousand net acres as of December 31, 2022. First quarter production from the Bakken totaled approximately 38.8 MBOE/d (59% oil and condensate).

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 closing adjustments.
Dan Steffens
Energy Prospectus Group
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