National Post (National Edition)

Investors balk at Baytex, Raging River $2.8B merger

- GEOFFREY MORGAN

CALGARY• The harsh investor reaction to Bay tex Energy Corp.’s $2.8-billion merger with Raging River Exploratio­n Inc. could put a chill on more consolidat­ion in the Canadian oilpatch, analysts say.

Baytex and Raging River announced an all-share deal on Monday worth $2.8 billion that would create a stronger combined organizati­on that is better able to develop its oil properties in Alberta and Texas, according to the companies.

Part of the rationale for the deal was to create a corporatio­n large enough to develop Raging River’s assets in the Duvernay, an emerging but expensive shale play in Alberta with huge potential.

The two Calgary-based producers said the combined company would produce over 100,000 barrels of oil and natural gas liquids such as butane, propane, methane and pentane this year.

“This is a rare opportunit­y where two companies complement each other so well that they have the potential to achieve something much greater than the sum of its parts,” Raging River CEO and chairman Neil Roszell said in a joint conference call.

Baytex indicated in the release it would pay down debt over time after the merger.

“The new entity is wellpositi­oned to pursue a blend of organic growth, debt reduction, strategic acquisitio­ns and/or reinstate a dividend in the future,” Baytex president and CEO Ed LaFehr said on the same call.

Baytex is issuing shares to finance the deal.

Even though Raging River announced in March that it was looking for “strategic alternativ­es,” including a potential sale, both the market and the analysts that cover the company reacted negatively to the deal.

Raging River shares plunged 10 per cent to $5.67 each in midday trading Monday and Baytex fared even worse, as the company’s shares fell close to 15 per cent to $4.38. Both stocks recovered slightly over the course of the day.

“If you’re a Raging River shareholde­r, I’m not quite sure you’re enamoured by this transactio­n, especially the share price reaction,” Raymond James analyst Jeremy Mccrea said, adding the deal worsened Raging River’s balance sheet.

Mccrea said he expects to see more mergers and acquisitio­ns in the Canadian oilpatch this year, as companies are looking to attract investor attention by acquiring size and scale, but market reaction to recent deals could give management teams pause.

Vermilion Energy Inc. announced a $1.4-billion allshare deal to buy Spartan Energy Corp. in April, the largest Canadian energy deal this year until the latest merger.

“You’re starting to see the consolidat­ion but given the share price reaction of Spartan, and Raging River now, and Baytex, I think there’s going to be some management teams and some investors that say, ‘Maybe we should reconsider getting bigger just to be bigger,’” McCrea said.

Paramount Resources Ltd. announced a $340 million deal to sell off oil and gas assets in Alberta to privately held Strath Resources Ltd. last week.

Deal-making activity in the domestic oil and gas sector is off to its slowest pace on record, according to Financial Post data. Through the first half of 2018, only 42 deals have been announced for a combined value of $20 billion, less than half the value of the 68 deals struck at this point last year worth $46 billion.

“I think there are definitely a number of junior companies that may have interest in selling,” said Canaccord Genuity analyst Dennis Fong, adding that the cost of issuing shares to fund those deals has been high.

While analysts like the deal’s effect on Baytex’s debt to cash ratios, they also raised concerns about dilution.

Raging River investors will receive 1.36 common shares of Baytex for each share they own, the companies said Monday. Baytex chief executive Edward Lafehr will remain in his post, and Raging River CEO Neil Roszell will serve as chairman. The two companies hope to close the deal by August.

RBC Dominion Securities analyst Greg Pardy believes the merger “is likely to make Baytex a more investable producer from an institutio­nal standpoint,” but added, “this will come at a cost — in the form of an all equity deal, which dilutes our first cut (cash flow per share) estimate by 19 per cent.”

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