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Baytex to Buy Raging River: A Closer Look

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Baytex Energy Corporation (BTE - Free Report) recently inked a $2.3 billion all-stock deal to acquire western Canadian oil explorer, Raging River Exploration Inc., in a bid to bolster its operations in Alberta’s East Duvernay Shale. Notably, it marks the biggest buyout in the Canadian oil patch this year.  

However, the deal failed to garner positive response from its shareholders, as evidenced by the dismal stock movement post the announcement of the merger. Shares of Baytex have dropped 11.92% to close at $3.40 on Jun 18, reflecting investors’ rough initial response toward the pricey deal. Investors are mainly concerned about the company’s intent to finance the deal by the issuance of new stocks that in turn are likely to hurt its earnings per share metrics.

Deal Terms

Per the deal, investors in Raging River will receive 1.36 shares of Baytex in exchange of their current shareholdings. Baytex’s bid represents 10% premium to Raging River’s closing share price on Jun 15.

The transaction has been unanimously approved by the board of directors of both the companies. Subject to satisfactory closing conditions, along with shareholders’ consent and other regulatory approvals, the deal is set for closure this August.

Post the culmination of the deal, the board of directors of the new entity will comprise six members of the Baytex board and four from the Raging River board. Baytex’s current Chief Executive Officer (CEO) Edward LaFehr will serve as the CEO of the merged entity while Roszell will be the Chairman. The new entity will operate under Baytex name with an enterprise value of $3.78 billion.  

Deal Benefits

Baytex’s operations are mainly focused on Eagle Ford, Peace River and Lloydminster regions while Raging River’s activities are mainly concentrated in East Duvernay (where it holds 260,000 acres of land), and Viking areas.

Thus, the buyout expands the geographical footprint of Baytex, creating an enviable diverse portfolio of oil assets in five core areas namely Viking, Peace River, Lloydminster and East Duvernay Shale regions in Canada, and the Eagle Ford play in Texas.

Post Baytex’s acquisition of rival Raging River, the combined entity is likely to produce around 94,000 barrels of oil equivalent per day in 2018. It targets another 5-10% growth in 2019 production, which is expected in the band of 100,000-105,000 Boe/d, of which 85% will be oil and natural gas liquids. Along with robust production growth, the combined entity looks poised for healthy cash-flow generation and solid balance sheet.

Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of asset, systems and staff.

Zacks Rank and Key Picks

Baytex currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space include Chevron Corp. (CVX - Free Report) , OMV AG (OMVJF - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chevron’s 2018 earnings are expected to increase 125.14% year over year.

OMV AG’s earnings for 2018 are anticipated to grow 13.01% year over year.

Shell surpassed estimates in each of the trailing four quarters, with an average of 10.15%.

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