Baytex Energy Corp. has ended a long drought of big acquisitions by Canadian oil companies, launching a $1.8-billion bid for an Australian-based firm to give it a position in a Texas shale oil formation that is key to surging U.S. crude output.
Baytex is buying Aurora Oil & Gas Ltd. in a friendly deal that gives it acreage in the red-hot Eagle Ford light oil and condensate play in south Texas.
It has agreed to pay $4.10 Australian ($4.06 Canadian) per Aurora share, a 52-per-cent premium above the last week's average price. Calgary-based Baytex will assume $744-million (Canadian) of long-term debt, lifting the value of the transaction to about $2.5-billion.
The company has pledged to increase its monthly dividend by 9 per cent to 24 cents a share after the deal closes in mid– to late May.
Most of Aurora's Eagle Ford acreage is in a field called Sugarkane, which pumped nearly 25,000 barrels a day of light crude oil in the fourth quarter of 2013. It is operated by Houston-based Marathon Oil Corp.
"The Eagle Ford play provides not only exposure to light oil, but also to Gulf Coast crude oil markets with established transportation systems," CEO James Bowzer said. "A portion of the produced crude oil benefits from Louisiana light sweet-based pricing, which currently trades at a premium to U.S. benchmark West Texas intermediate."
The deal flow in the Canadian oil patch slowed to a trickle in 2013 on worries about volatile oil and gas prices, delays in increasing the capacity to move oil to export markets, and rising development and operating costs. In addition, equity financing slowed as interest among investors, especially American ones, waned.
Baytex's deal shows that the sector may be coming back into favour, at least for transactions that stand to boost production and cash flow per share. To help fund it, the company is issuing $1.3-billion of subscription receipts in a bought deal co-led by Bank of Nova Scotia and RBC Dominion Securities. It will also tap its credit facilities.
The sheer size of the deal for Baytex, and assumption of debt, is a little worrisome, said Laura Lau, senior portfolio manager at Brompton Funds, which does not own Baytex shares.
"It is manageable, but certainly the balance sheet is no longer pristine," Ms. Lau said. "There's no doubt the Eagle Ford is a good play but they are not operating the play."
Baytex shares are down 11 per cent in the past year, underperforming a the TSX energy group, which has gained 7.4 per cent.
The acquisition adds a new key area to Baytex's operations in the Peace River, Alta., oil sands region, Lloydminster heavy oil fields and the Three Forks-Bakken in North Dakota, which is the other main U.S. oil shale region.
The company said the deal would boost per-share reserves by 37 per cent, production by 18 per cent and cash flow by 17 per cent. Overall output would climb to an estimated 80,000-90,000 barrels a day in 2014, from 61,000.