Calgary-based Baytex Energy Corp. expanded its holdings in Texas on Tuesday with a US$2.5-billion acquisition financed with loans from three Canadian banks.
Baytex struck a friendly takeover for Houston-based Ranger Oil Corp. that more than doubles the Canadian company’s oil production and property portfolio in Texas’ Eagle Ford region. Baytex also owns oil and gas fields in Alberta and Saskatchewan. In a press release, chief executive Eric Greager said: “We are building an even stronger Canadian energy company with a high quality, diversified oil-weighted portfolio.”
Baytex is buying a collection of Texas oil properties assembled over several years by Houston-based private equity fund Juniper Capital Advisors L.P. through a series of debt-financed acquisitions. Juniper owns a 54-per-cent stake in NASDAQ exchange-listed Ranger and agreed to support the acquisition.
The deal will cost Baytex US$1.85-billion, with 70 per cent of the purchase price paid in stock and the remainder in cash. The Calgary-based company will also take on US$650-million of Ranger’s debt, which it plans to replace with new loans at lower interest rates.
Baytex plans to finance the cash portion of the deal, including paying off Ranger’s debt, with a total of US$1.75-billion in loans from three Canadian lenders: Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia.
At a time when European banks such as HSBC Holdings PLC are pulling back on lending to fossil-fuel producers, because of concerns over greenhouse gas (GHG) emissions and climate change, Canadian banks continue to finance energy companies with growth plans.
In fiscal 2022, the five largest Canadian banks lent a total of $103.2-billion to oil and gas companies, while the previous year, they lent $137-billion to the sector. Bank executives have consistently said they will provide the capital needed to help energy companies invest in the transition to a low-carbon economy.
Takeover activity in the oilpatch is a major source of revenue for investment banks. Canadian energy companies were involved in 126 mergers and acquisitions valued at $30.5-billion in 2022, according to data released on Tuesday by financial advisory service Crosbie & Co.
Expanding in Texas is expected to lower Baytex’s overall break-even price on oil production by US$7 per barrel, to US$41, and double the company’s free cash flow. The Texas properties are close to pipelines and refineries, which lowers production costs and improves efficiency. Baytex said acquiring Ranger will lower its GHG emissions intensity by 16 per cent.
After the takeover closes, Baytex will begin paying a common share dividend of 9 cents per share. The company is earmarking 50 per cent of its cash flow for dividends and share buybacks, and plans to pay down loans quickly, with a debt target of US$1.5-billion. When it achieves this debt level, Baytex said it will begin returning 75 per cent of its cash flow to shareholders.
Mr. Greager joined Baytex last November after spending four years as CEO at Denver-based Civitas Resources Inc., and prior to that, he worked at Calgary-based Encana Corp., which had extensive holdings in Texas. Two Ranger directors are expected to join the nine-member Baytex board as part of the transaction, including Encana veteran Jeffrey Wojahn.
CIBC Capital Markets, RBC Capital Markets and Scotiabank advised Baytex on the acquisition, along with law firms Vinson & Elkins LLP and Burnet, Duckworth & Palmer LLP. BofA Securities Inc. and Wells Fargo Securities LLC are representing Ranger, while its law firms are Kirkland & Ellis LLP and Stikeman Elliott LLP.
Baytex’s expansion in Texas comes after other Calgary companies also opted to expand in the U.S. Ovintiv Inc. – formerly a division of Encana – moved its headquarters to Denver, from Calgary, in 2020 as it prioritized its U.S. assets. In December, Enerplus Corp. completed the sale of its Canadian operations, leaving it with assets in North Dakota and Pennsylvania.