Ovintiv Inc. OVV-T, formerly Encana, is spending US$4.3-billion to acquire oil assets in the Permian Basin that spans Texas and New Mexico, shifting more of the company’s production profile away from its Canadian roots.
Ovintiv is paying US$4.3-billion, including debt, in cash and stock to buy the assets from private equity firm EnCap Investments. Ovintiv, which is now based in Denver, also announced a 20-per-cent increase to its quarterly dividend, giving the shares a 3.3-per-cent dividend yield at the time of the deal announcement.
Ovintiv’s existing production profile is split between natural gas in northwest British Columbia’s Montney formation and oil in the southwest United States. To pay for the new assets, Ovintiv will use cash on hand, sell assets in the Bakken formation in North Dakota for US$825-million, and also take on new debt.
Ovintiv’s shares ended the day at $54.13, up 11.1 per cent in Toronto on Monday jumped 13 per cent in Toronto on Monday. However, many oil-producing companies saw their stocks climb higher after OPEC+ announced a surprise production cut over the weekend.
In its previous incarnation as Encana, which was based in Calgary, Ovintiv was a Canadian energy giant. For a time, it was Canada’s most valuable company, worth more than even Royal Bank of Canada. However, the company split itself in two in 2009 by selling all of its oil-producing assets to Cenovus Inc.
At the time, natural gas was seen by many as the clean fuel of the future, but the shale gas revolution in the United States flooded the market with supply and Encana was hit hard.
In 2013 the company hired American executive Doug Suttles, who previously worked for BP, to fix its woes, and his grand plan was to shift the company’s centre of gravity south of the border by reinvesting in oil.
In theory, the plan made sense, because natural gas prices were trading at depressed levels, and Mr. Suttles also had cash available from the spin-out of PrairieSky Royalty Ltd. However, his timing was quite unfortunate.
Around 2014, Encana paid US$3.1-billion for a position in the red-hot Eagle Ford shale fields in Texas, then spent another US$5.9-billion in cash for Athlon Energy, giving it a sizable stake in the state’s oil-rich Permian Basin.
But in September, 2014, OPEC kingpin Saudi Arabia decided it would no longer reduce its own output to prop up world oil prices, while other countries, notably the United States and Canada, pumped at full capacity. The Saudis cranked open their taps, and the price of West Texas Intermediate oil tumbled to US$53 a barrel by the start of 2015, from US$105 in June, 2014.
In March, 2021, Encana, by then renamed Ovintiv, sold its Eagle Ford assets – the ones Mr. Suttles spent US$3.1-billion to acquire in 2014 – for US$880-million. In all, the company wrote down US$20-billion in assets.
The deals also saddled Ovintiv with high debt levels and many investors fled, in part because of the financial burden amid low energy prices, but also because many institutional shareholders started following environmental, social and governance guidelines that frowned upon fossil-fuel production.
Despite the growing ESG focus and concerns about the company’s debt level, Encana went out and spent US$5.5-billion on the acquisition of Newfield Exploration in late 2018. The deal provided an entry into what was once seen as a promising shale play in Oklahoma, but Newfield had waning support by the time Encana arrived. The takeover also increased Encana’s debt (again) because Newfield had US$2.2-billion in net debt on its books.
Ovintiv’s shares rallied in 2022 because of Russia’s invasion of Ukraine, which sent natural gas and oil prices soaring, but its shares are still down 78 per cent from the peak in 2007.
With files from Jeffrey Jones
Tim Kiladze