BTE - Ranger Oil: Acquisition Will Drive Accretion

2023-04-17 07:12:23 ET

Summary

• Ranger Oil Corp. is set to be acquired for C$3.4 billion ($2.5 billion), freeing up a net debt of $650 million.
• Ranger Oil's product portfolio includes more than 162,000 net acres of proved/developed reserves.
• Ranger Oil’s total sales volumes on both quarterly and annual analyses have increased on all commodities (crude oil, NGLs, and Natural gas) in FY 2022.

Ranger Oil Corp. ( ROCC ) reported Q4 2022 revenue of $269.15 million beating Wall Street estimates by $1.80 million. It represented an increase of 19.53% (YoY) while its EPS of $4.95 beat forecasts by $2.15. The stock’s price return is up 14.55% (YoY) and currently trading 19.59% below its 52-week high of $53.59. Ranger is on the verge of being acquired by Baytex Energy Corp. (BTE) in a $2.5 billion cash-and-stock deal expected to close sometime in Q2 2023.

Thesis

I believe that the merger between Ranger Oil and Baytex is strategic for both companies, since in my view we are still at the beginning of a multi-year energy bull cycle- post-pandemic. I also think the US energy sector will be trading at a premium as compared to mid-cap Canadian commodities. Ranger Oil being primarily a pure-play Eagle Ford shale operator has been increasing its drilling sites in the area in a bid to raise its valuation in tandem with the volatile oil prices. ROCC is also taking care of shareholders by implementing a decent dividend amidst a subtle debt portfolio.

What’s in it for shareholders in the deal?

As per the merger agreement, ROCC shareholders are to receive 7.49 Baytex common shares and $13.31 in cash (for every common share). The total consideration for this deal is expected at $44.36 representing a premium of almost 3% to ROCC’s current closing price. With the deal expected to close in June 2023, we are likely to have some price adjustments as the market prices in the acquisition.

Canadian energy giant, Baytex is set to buy US oil and gas Company Ranger Oil for C$3.4 billion ($2.5 billion) in a deal that also assumes debt. As noted earlier, ROCC operates in the South Texas region of Eagle Ford Shale, a location where Baytex Energy also has assets.

Firstly, Baytex Energy does not currently pay a dividend while Ranger Oil’s average yield over the past 4 years is at a paltry 0.06% (representing a decline of 98.70% from the industry average of 4.40%). The forward dividend yield is expected at 0.69%. After the acquisition, Baytex is expected to pay shareholders a quarterly dividend payment of at least 2.25 cents a share, which is higher than the $0.23 ((TTM)) currently paid by Ranger Oil translating to a quarterly rate of $0.075 a share. For Baytex, it will not only introduce a dividend but also enhance free cash flow thereby increasing shareholder returns.

As part of the agreement, Baytex Energy will also be taking up Ranger Oil's net debt which stands at $650 million, which according to me, will help the company save more cash. That being said, this deal will help Baytex take advantage of Ranger Oil's product portfolio and cost reduction measures. It will also allow for the implementation of efficient drilling measures. In my view, Ranger Oil, unlike many energy companies has managed to control its debt and expenses despite having a market cap close to $1.8 billion. This situation is present even though Ranger Oil lacks an independent method of generating revenue. Therefore, its dividend payment will be dependent on the cash distribution made in this partnership. So what we are looking at now is a mix of both deleveraging and a strengthened dividend from Baytex’s side.

Ranger Oil’s Proved Reserves

The Eagle Ford Shale, according to government statistics is roughly 50 miles wide and 400 miles long. The rig count in the area has been constantly rising over the past three years.

The Eagle Ford shale has the second-highest number of rigs at 78 with the first being the Permian Basin.

As of March 3, 2023, Ranger Oil was leasing about 187,000 gross (163,000 net acres) which according to the company is enough to support a multi-year drilling inventory. This area will be open for Baytex’s operation through the Karnes Trough. Ranger Oil’s total sales volumes (in FY 2022) entailed 72% crude oil, 15% natural gas liquids ((NGL)), and the remaining 13% natural gas. Crude oil accounted for about 88% of the total $1.1 billion in product revenues.

On annual analysis, Ranger Oil is currently riding on its record earnings with revenue up almost 100% (YoY) from $552.7 million in 2021 to $1.093 billion in 2022. Net income has also surged more than 441% (YoY) from $40.2 million to $217.7 million in 2022. Ranger Oil's criteria of utilizing "short-term floating price physical and spot market contracts" to sell its crude oil, NGL, and other natural gas products have proven successful over time and contributed to the strategic revenue increase.

Also open to Baytex, is 254.5 MMboe of Ranger Oil’s proved reserves (as of December 31, 2022) whereby 42% of this capacity was “proved developed reserves” with 67% accounting for crude oil. Into 2023, Ranger Oil has 976 gross (857.2 net) productive wells. Of this number, it directly operates 97%, leases about 188,900 gross (162,100 net) acres that also accrue royalty interests while 34% of the leasehold remains underdeveloped. The FY 2022, saw ROCC develop and sell from 59 gross (49.9 net) wells.

Ranger Oil’s sales total sales volumes on both quarterly and annual analyses have increased on all commodities (crude oil, NGLs, and Natural gas). The sale volume of crude oil has grown 3.33% (QoQ) and 38.35% (YoY). Sales volumes of NGLs have surged 66.29% (YoY) while natural gas is up 46.63% (YoY). This translates to an average daily sales volume growth of 46.63% (YoY) for FY 2022.

Earlier on, I indicated that we are still at the beginning of a multi-year energy bull cycle- post-pandemic and commodity prices are set for an upside into 2024. The higher sales volumes noted with Ranger Oil in FY 2022 were supported by rising commodity prices.

The aggregate realized prices for crude oil, NGLs, and Natural gas recorded an increase of 34.98% (YoY) to $76.67 per boe in FY 2022 from $56.80 per boe in FY 2021. Crude oil surged the highest at $94.04 per bbl (growing 40.17% Y/Y), NGLs were up 21.24% (YoY) at $30.59 per bbl while Natural gas soared 50.64% (Y/Y). These figures show that Baytex's deal with Ranger Oil is set to increase its pipeline capacity in the long term.

Risks to Consider

Failure to complete the Baytex merger will dent Ranger Oil’s share price. The stock has been trading in direct correlation to the merger price of $44.36. Additionally, the fluctuation of Baytex common shares as well as differences in the exchange ratio will affect shareholder returns.

Further, a decline in the prices of crude oil, NGL, and natural gas will also affect the company's future revenues and drilling progress currently in progress with the company.

Bottom Line

Ranger Oil is committed to providing shareholder returns through its merger agreement with Baytex Energy. According to me, this deal is the driving force behind the company's success seen by the market's pricing in the stock price. I would recommend a hold rating as we observe how the merger agreement plays out.

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