Baytex and Ranger Oil: Makes Sense, The Sell-Off Is Over

The Eagle Ford has been getting a second look since Devon and Marathon made their moves. What's up? Read on.

Gosh, I’ve been neglecting you good folks. Good thing this blog is free-for now. My consulting business has been on fire recently and sucking away all my energy, by way of explanation. By way of apology for the neglect, here is a piece I put together for my Seeking Alpha membership-just last week. Hot off the press, have a read!

We haven’t discussed Baytex Energy, (BTE) in this blog previously. On another site, I looked at it a couple of years ago at about $0.57 per share. It was under a delisting notice then due to its shareprice and we gave it a neutral rating. That turned out to be a pretty good entry point as the stock has rallied as high as $7.00 USD per share in the intervening time. Such is life!

BTE made news toward the end of Feb with its announcement of the merger with Ranger Oil Corp, (RROC) for about $2.5 bn last week. The market's initial take wasn't very favorable as the stock of BTE swooned from its already low level.

In this article we will run through the company's rationale for this deal, which doubles its size at one fell swoop. The market had begun forgiving BTE in recent days as the news has been digested. An upgrade from TD Cowan didn't hurt in this regard, but there's probably-almost assuredly more to it.

First a point of interest

The Eagle Ford has been undergoing an increased level of renewed interest. A couple of operators we follow closely-Marathon, (MRO), and Devon Energy, (DVN) have made significant moves in the past half year to enhance their Eagle Ford position with impressive multi-billion dollar acquisitions. In general the reason is Eagle Ford has a couple of features that suitors are finding attractive. One is the oil cut. The second is the proximity to market-near Corpus Christie. In that context the tie-up between Baytex and Ranger makes sense, and was probably informed by Eagle Ford partner MRO's recent move (discussed above).

For those who are new to BTE, they have had a Marathon Oil operated position in the Eagle Ford for some years now. BTE’s entry has an operator is a ratification of that investment.

Here is BTE's explanation for the value in the deal

When all the "T's" are crossed and the "i's" dotted on this deal BTE will have vastly increased its scale in this important basin with ready access to the Corpus export market. More importantly it brings production without the "tax" of the WCS discount, currently in the mid-$20's per barrel. The acreage covered in the deal is yielding 87% light oil and nearly 800 new drilling locations. New locations are the life-blood of an oil company, and BTE estimates these will enable 12-15 years of development without further acquisitions.

The terms of the deal don't appear particularly onerous. The deal price of $44.36 USD is a modest 7.6% premium to the Feb 24th closing price. Consisting of mostly stock and debt assumption that results in a very attractive EV/EBITDA multiple of 2.88X. Baytex leadership will remain in place.

Here's the key

The Ranger acreage lies almost entirely in the Tier I black oil strata of the Eagle Ford in Gonzales and Lavaca counties. This is noteworthy as it follows the strategy employed by Devon and Marathon in their recent Eagle Ford acreage pickups. I see the non-op stuff (MRO is operator) as an advantage as it will give them access to MRO's development strategy. MRO is a world class operator able to compete with anyone in the market. In effect, although BTE is coming to a new area, they don't have to reinvent the wheel.

Along with the asset itself, comes the experienced Ranger personnel now operating the fields. These folks have obviously been doing a great job managing the asset and nothing may change. Still it would be hard to think they wouldn't tap the MRO data base to which they now have access. Marathon has been making great wells in the Eagle Ford with some from the Ensign pickup making IP:30's of 2,500 BOPD. If BTE can match performance like that from their acreage (in the same Gonzales/Lavaca counties as MRO), this will turn out to be a very good deal indeed.

Cash Flow improves 2023-2026

BTE cash flow as a standalone was on a positive track that is enhanced about 23% with the assets of the merged company. With breakeven in the low $40's, and without the WCS discount, the Eagle Ford assets put new money in BTE's pocket from day one. It also works to smoothout cash flow troughs, like the one the WCS discount is currently imposing, with light oil production that has ready access to a wide open export market.

Your takeaway

BTE/Ranger presents a pretty compelling picture in as combined company. As noted above the combination will trade under 3X EV/EBITDA, and about 3.5X forward cash flow.

Analyst's rank the company as a Overweight, with a modest CAD upside to $7.40 from the current $5.40.  That clearly predates the Ranger announcement, and I expect updates will boost the marketability of the stock, which has also been enhanced with a NY listing with the same symbol as their TSX listing-BTE.

The Ranger deal looks clearly accretive to me and BTE is forecasting ~$1.2 bn USD in free cash this year. That opens the door to shareholder returns to which the company discusses in their deal packet. (slide above).

Most of this commentary has been about the Ranger deal as you would expect. No article on BTE is complete without a quick note on their progress with their acreage in the Peavine, Clearwater area. BTE is making solid progress with this low cost, low decline asset as noted in the IP:30's below.

Bottom line, I think BTE makes an attractive case for new investment or addition to standing positions at current prices. We've established that the current downdraft impacting oil prices is coming to an end in the near future. It's hard to say when that will happen, but folks who pick up shares of BTE now should be rewarded with near term gains upon that eventuality.

Disclosure. The author has no position in Baytex but may initiate one soon.

Disclaimer. Nothing I say in this article should be construed as investment advice. It may look or sound like it, but it is not. I am not a CPA/CFA and have no formal training/certifications/licences in either discipline. In these articles I present analysis and relevant information that an interested investors may find instructive. I may be bullish, bearish, or neutral and will discuss why, but I am definitely not recommending you buy or sell any security I discuss. Investors should always do their own due diligence before plunking down their hard-earned cash. They alone are responsible for their investing decisions.