DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Senior Notes rating of Ovintiv Inc. (Ovintiv or the Company) at BBB (low) with Stable trends. The rating confirmations and Stable trends factor in the recently announced Permian Basin acquisition (the Transaction) for $4.275 billion. The Transaction at close will add approximately 75 thousand barrels of oil equivalent per day (mboe/d) of production (approximately 80% oil and condensate) and approximately 800 premium drilling locations in the Permian Basin. The Transaction is to be funded by a combination of debt ($2.3 billion), equity issuance to the counterparty ($1.15 billion), and proceeds from a concurrent divestiture of its Bakken asset ($0.82 billion). The Transaction is expected to close in June 2023 with an effective date of January 1, 2023.
DBRS Morningstar expects the Transaction to have a modestly positive impact on the Company's business risk profile. Overall production (net of the Bakken disposition of 37 mboe/d) is expected to trend higher, and the additional scale and the ability to use Ovintiv's successful drilling and completion techniques should improve the Company's cost structure and capital efficiencies in the Permian Basin. While the sale of the Bakken assets does modestly weaken the Company's geographic diversification, operating efficiency is likely to improve as the acquired assets have higher netbacks because of the greater contribution of oil and condensate (80% versus 60% for the Bakken assets) to overall production and lower transportation and processing costs relative to the Bakken assets. Ovintiv expects the Transaction to add incremental EBITDA of $1.0 billion under its mid-cycle pricing assumptions of West Texas Intermediate: $65/barrel and New York Mercantile Exchange: $3.00 per thousand cubic feet. DBRS Morningstar expects the Company's reserve related attributes to remain relatively unchanged as a result of the Transaction. DBRS Morningstar also notes that the acquired assets have ample gathering and processing infrastructure to support current and future production.
DBRS Morningstar expects the Transaction to have a negative impact on the Company's financial risk profile because of a material increase in debt ($5.9 billion of total debt at close of the Transaction). Despite weakening, Ovintiv's financial risk profile has adequate headroom because of the significant deleveraging over the last two years and is expected to remain supportive of the rating. Ovintiv has revised its long-term gross debt target to $4.0 billion (previously $3.0 billion) and intends to direct 50% of its free cash flow (cash flow after capital expenditure (capex) and dividends) surplus toward reducing debt. The Company intends to structure the repayment profile of the incremental debt to facilitate the reduction of debt without prepayment penalties over the next three years. Ovintiv has budgeted capex between $2.6 billion to $2.9 billion in 2023, and DBRS Morningstar expects that capex will trend materially lower in 2024 and 2025 as Ovintiv focuses on maintaining production and deleveraging. Based on its base-case commodity price assumptions, DBRS Morningstar expects the Company to deleverage modestly (approximately $500 million) by year-end 2025. DBRS Morningstar expects the Company to maintain its lease-adjusted debt-to-cash flow ratio at or less than 2.50 times (x) through the forecast period and the financial risk profile to remain supportive of the ratings. DBRS Morningstar also expects the Company to continue to use hedging as a risk management tool (approximately 25% of production) and prioritize the balance sheet in the event of material reduction in commodity prices as demonstrated in 2020. DBRS Morningstar believes the Company has sufficient liquidity with $3.1 billion available under its credit facilities at December 31, 2022.
A negative rating action is possible if the Company's lease adjusted debt-to-cash flow ratio consistently exceeds 3.0x materially as a result of steep decline in commodity prices. A rating upgrade is unlikely until the Company's lease adjusted debt-to-cash flow ratio is consistently less than 2.0x at DBRS Morningstar's base-case price assumptions.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered Carbon and Greenhouse Gas Costs as a relevant Environmental factor, given that compliance with ever-increasing environmental regulations and standards is adding costs for oil and gas producers such as Ovintiv. While Ovintiv's cost of complying with current environmental regulations is not expected to be material, additional environmental regulations could add incremental costs for Ovintiv and the oil and gas industry as a whole.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022) https://www.dbrsmorningstar.com/research/402196
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577