Baytex Energy Corp. is buying rival oil producer Raging River Exploration Inc. for about $1.4-billion in an all-stock deal that bolsters the buyer’s debt position while adding a new exploration area.
Executives touted the deal as the creation of well-capitalized, oil-focused company with “world-class” assets, but investors were unimpressed. Baytex shares sank 12 per cent while Raging River stock lost 10 per cent on the Toronto Stock Exchange on Monday.
Baytex, best known for Canadian heavy-oil production and oil-shale holdings in the Eagle Ford region of Texas, is offering 1.36 of its shares for each Raging River share in the friendly deal, representing a premium of 10 per cent above the target’s closing price on Friday.
Raging River put itself on the auction block in early March as its stock languished despite a small debt burden and a strong operating record in its main oil-producing area, Alberta’s Viking formation.
At least some investors had been hoping that the process would result in the sale of the main operating assets and the spin-out of a new exploration firm to concentrate on the early-stage East Duvernay oil region, where Raging River has 260,000 acres. But Baytex is absorbing the entire company.
It is the second all-share transaction in recent months to get a rough ride in a shaky energy market where investors seek the stability of cash. In April, Vermilion Energy Inc. said it was buying Spartan Energy Corp. for $1.2-billion in stock; shares in both companies also fell on the day of the announcement.
“When today’s transaction is viewed in conjunction with the recent Vermillion/Spartan deal, we believe the message is that capital availability for large-scale cash acquisitions is largely non-existent as long the negative market sentiment for Canadian [exploration and production] persists,” Beacon Securities analyst Lyndon Dunkley said in a note to clients.
The combined company will produce 100,000 to 105,000 barrels a day, with capital spending expected to ring in at up to $850-million in 2019.
“Our vision is to build this top-tier North American oil company through disciplined growth and returns to shareholders,” said Baytex chief executive officer Ed LaFehr, w ho will become CEO of the combined entity . “The new company will be a self-funded business model focused on per-share growth, targeting a 10- to 15-per-cent total return to shareholders.”
Mr. LaFehr said the acquisition will reduce its debt to 1.9 times annual cash flow, with an overall goal of cutting it to the industry standard of 1.5 times. That would be down from the current level estimated at around three times, based on Baytex’s debt of $1.7-billion at the end of the first quarter.
As a result, Baytex has put plans on selling a portion of its Eagle Ford properties on the back burner, he said.
“Given the modest premium, we think the merits of the transaction are mainly scale, diversified portfolio and a more flexible capital allocation, all of which are geared towards the long term,” Royal Bank of Canada analyst Greg Pardy wrote in a research note.
There are no current plans to unload any of the assets that the resulting company will hold. Plans call for maintaining most of the two firms’ staff as well, executives said.
The deal requires approval by at least two-thirds of Raging River shareholders and at least 50 per cent of Baytex shareholders. It is scheduled to be completed in August.