Raymond James’ Jeremy McCrea lowered his recommendation to “market perform” from “outperform” and cut his target to $5.50 from $8.
“Over the last few years, Baytex had seen one of the largest corporate turnarounds in the sector. Leverage had declined, well economics greatly improved, and the company’s multiple began to rise as shareholder friendly initiatives and ‘value added’ growth was taking place,” Mr. McCrea said. “Unfortunately, in our opinion, the Ranger transaction has changed this momentum. From a higher level, we find three key themes that ultimately lead to corporate challenges: 1) high debt; 2) variable or lower quality assets; and 3) high base ‘cashflow’ declines. On the surface, none of these individual factors would be a cause for concern but when combining these three items together (at their current levels), management will likely need to show exceptional execution. ... We believe that there is much more risk to the name going forward – especially as it starts with a multiple re-rate.”
“Ultimately, we would argue Baytex is not a better company after this transaction. That said, we suspect the company felt their inventory in core plays wasn’t sufficient, and thus needed to do an acquisition (which implies the prior multiple may have been too high). Overall, we expect that investors will be asking if the transaction needed to be as large, and if more work could have been done on organic exploration? We believe this is likely why the share price fell as much as it did [Tuesday] (down 9 per cent vs. XEG: down 1 per cent) and why we believe there’s potentially further downside.”