Morningstar DBRS Comments on Ovintiv Inc.'s Announced Alberta Montney Asset Acquisition and Simultaneous Uinta Basin Asset Sale; Issuer Rating Unchanged at BBB (low)

We note that Ovintiv Inc. (Ovintiv or the Company, rated BBB (low), Stable) announced today that it has entered into an agreement to acquire certain Montney formation assets located in northwestern Alberta from Paramount Resources Ltd. in an all-cash transaction valued at approximately $2.377 billion (CAD 3.325 billion at foreign exchange = 1.40). The acquisition would add about 70,000 barrels of oil equivalent per day (boe/d) of production, consisting of 230 million cubic feet per day of natural gas, 25,000 barrels per day (bpd) of oil and condensate, and about 6,000 bpd of other natural gas liquids. We view the acquisition as a very good fit with Ovintiv. The oil-rich assets to be purchased are in close proximity to the Company's existing Montney operations, with access to midstream infrastructure and available capacity.

Additionally, Ovintiv has an agreement to sell substantially all its Uinta Basin assets located in northeastern Utah to privately held FourPoint Resources, LLC for total cash proceeds of approximately $2.0 billion. During the first nine months of 2024 (9M 2024), Uinta Basin oil and condensate production was 32,900 boe/d. Therefore from the combined transactions, Ovintiv will add approximately 37,100 boe/d net production, and the Company's 9M 2024 production will increase by about 6% to 624,000 boe/d (pro forma basis).

Ovintiv should benefit from cost synergies from the combined transactions, estimated by the Company to be $125 million annually. Following these transactions, Ovintiv will streamline its portfolio and focus its resources on core positions in the Montney and Texas Permian, supported by production from holdings in the Anadarko Basin in Oklahoma. Further, we note that the combined transactions will add to the Company's sizable exposure to North American natural gas markets and related gas price volatility. Although positive, the combined transactions are not material enough to change the Company's business risk profile, which is already sound.

The Montney acquisition is expected to be funded through a combination of cash proceeds received from the pending sale of the Uinta assets, cash on hand, as well as borrowings under the Company's credit facility and/or temporary financing. The net difference between the purchase price for the Montney assets and the expected proceeds from the sale of the Uinta assets is approximately $377 million. To facilitate debt repayment, Ovintiv has temporarily paused its share buyback program, starting in October 2024, until the cash borrowed under the temporary financing has been repaid. Ovintiv estimates that share buybacks will resume in Q2 2025. The base dividend is expected to remain the same. Following the combined transactions, we expect Ovintiv to maintain a lease-adjusted debt-to-cash flow ratio at around 2.0 times. Overall, our Issuer Rating on Ovintiv remains unchanged at BBB (low) with a Stable trend.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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