What happened
Baytex Energy (BTE 2.88%) shares were plunging this morning, down 8.7% as of 10 a.m. ET. The Canada-based oil and gas producer announced a big acquisition today and also intends to reinstate a dividend, but investors worry this may not turn out as good as it appears.
So what
Baytex Energy, which operates in the Western Canadian Sedimentary Basin and the Eagle Ford in the U.S., will acquire Ranger Oil (ROCC) for $2.5 billion including debt of $650 million in a deal expected to close in the second quarter. Ranger shareholders will receive 7.49 Baytex shares plus $13.31 in cash for each Ranger common share, for a total consideration of roughly $44.36 per share. That represents a premium of around 7% over Ranger Oil stock's Monday closing price.
This looks like a big growth leap for Baytex Energy for several reasons. First, Ranger Oil is a pure-play Eagle Ford company and will therefore significantly boost Baytex's foothold in the shale basin.
Second, Baytex says the acquisition will boost its production by 12% and be immediately accretive to its earnings and cash flows. It expects its free cash flow (FCF) per share to rise by nearly 20%.
Above all, Baytex plans to use the incremental cash flows to reward shareholders and expects to boost its buyback program as well as initiate an annualized dividend of $0.09 per share. The first dividend could be paid in October this year.
Now what
Baytex Energy generated record FCF of $622 million, or $1.11 per share, in 2022. It expects the Ranger acquisition to boost its FCF per share by 23% over the next five years.
That sounds great, so why is the oil stock crashing today?
Investors who have waited patiently for a long time are angry at the small potential dividend they can expect, and worse yet, can't seem to forget the ghosts of 2009 when Baytex made a costly acquisition that eventually forced management to suspend dividends and sent Baytex stock's price plunging below $1 by 2020.
