Baytex Energy Group eyed opportunities to expand in the Eagle Ford for several years before striking a $2.5 billion deal with pure-play E&P Ranger Oil Corp., but some analysts and investors wonder if scooping up Ranger is the right move for the Canadian company.
Calgary-based Baytex Energy said its $2.5 billion bid to acquire Houston-based Ranger Oil would benefit the company in several ways. The Ranger deal would materially increase Baytex’s scale in the Eagle Ford, adding 162,000 net acres and 67,000 boe/d to 70,000 boe/d of production.
The deal extends Baytex’s inventory runway, boosts the company’s production of light oil and reduces its asset-level breakeven price to $41/bbl, a decrease of $7. The acquisition is expected to be accretive on key financial metrics, including doubling its EBITDA and nearly doubling its free cash flow.
Acquiring Ranger will also enable Baytex to return 50% of its free cash flow to shareholders. Upon the closing of the deal, Baytex aims to initiate a quarterly dividend of $0.0225/share, or $0.09/share on an annual basis. The company also plans to boost its share buybacks once the deal closes, which is expected late in the second quarter.
Baytex president and CEO Eric T. Greager, who joined the company in November 2022 after previously serving as president and CEO of Civitas Resources Inc., said the deal gives the company more flexibility in deploying capital. If commodity prices fall, Baytex can direct capital from its heavy oil assets in Canada to its Eagle Ford light oil assets, where breakeven prices are lower.
“In a single move, we were able to create accretion across the financial metrics while building a bigger, better and more durable business that has a defensive element to it,” Greager said during a call with analysts on Feb. 28.
More broadly, the transaction would be the first merger between public oil and gas companies since the combination of Whiting Petroleum Corp. and Oasis Petroleum Inc. to form Chord Energy last year, according to data from research and analytics firm Enverus.
The market for public company mergers had been slowing down the past few years as buyers looked for deals with inventory-rich, private equity-backed companies.
The deal between Baytex and Ranger may not foreshadow a wave of public company M&A, but it is positive to see that there are still small- to mid-cap (SMID-cap) energy companies open to sales and buyers willing to consider their offers, said Andrew Dittmar, research director at Enverus Intelligence.
“Given the relative lack of inventory that some SMID-cap companies hold and the challenges of buying more at their current stock valuations, I think more should explore an exit,” Dittmar said in a Feb. 28 research note.
Analyst caution and investor selloff
Greager said the opportunity to pick up Ranger checks nearly all the right boxes for the company, but some investors and analysts have expressed concerns about the proposed deal.
After announcing the deal before markets opened on Feb. 28, Baytex’s stock price fell over 10% to close at a 52-week low of $3.87/share, according to Yahoo Finance data (BTE stock has rebounded a bit, however, closing up around 3% at $4 per share on March 2).
Baytex owns a non-operated position in the Eagle Ford, which is operated by Houston-based Marathon Oil Corp., but the company’s operated assets are in western Canada. So, there are limited synergies for Baytex to take advantage of in the Eagle Ford as the company looks to develop and operate assets in the region, Dittmar said.
Jeremy McCrea, managing director of energy research at Raymond James, told Hart Energy that lack of operating synergies was probably a bit of a head-scratcher for Baytex investors.
“[The deal] doesn’t appear to have any synergies here off the bat,” McCrea said.
McCrea argues that the Ranger acquisition won’t make Baytex a better company. Dilution of the company’s inventory is a top concern: Baytex’s existing wells had an average payout timeline of around nine months, according to investor materials. The Eagle Ford inventory added through the Ranger deal has an average payout of about 1.3 years.
It will take even longer for Ranger’s wells to payout enough to reach a profit to cover debt payments, dividends and other expenses. The timeline for a 2x payout for most of Ranger’s wells is around 10 years, according to Raymond James research.
Meanwhile, the timelines for a 2x payout from some of Baytex’s existing plays, like the Clearwater play in northwest Alberta, are much shorter.
“Yes, [the deal] is accretive on a cash flow basis,” McCrea said. “But so much of Baytex’s stock was actually based on future inventory, which they really diluted with the inventory they picked up from Ranger.”
The Eagle Ford Shale Takes Flight
Fly, Eagle Ford, fly
The Eagle Ford has taken a step back in recent years with the prolific Permian Basin stealing much of the limelight. But the South Texas shale play began to show signs of a resurgence last year, and the play has seen notable transactions so far in 2023.
As part of its quest to become a pure play natural gas company, Chesapeake Energy Corp. recently agreed to sell about 172,000 net acres and 2,300 wells in the black oil portion of its Eagle Ford asset to U.K.-based INEOS Energy for $1.4 billion.
In January, Chesapeake entered into an agreement to sell its Brazos Valley footprint to WildFire Energy I LLC for $1.425 billion.
Marathon Oil, one of the largest players in the Eagle Ford, acquired basin pure-play Ensign Natural Resources in a $3 billion cash deal in November 2022.
SilverBow Resources closed four acquisitions in the Eagle Ford in 2022, which added more than 350 gross drilling locations.
Amid a flurry of M&A activity in the region, McCrea wonders why more experienced Eagle Ford operators didn’t try to pay a higher premium to buy Ranger if the company’s assets truly had as much upside as Baytex is portraying.
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