Baytex to Acquire Eagle Ford Operator Ranger Oil, Accelerates Shareholder Returns and Introduces a Dividend with Enhanced Free Cash Flow

2023-02-28

TSXV - TSX Venture Exchange · Oil · Natural Gas · Natural Gas Liquids · Lithium · Canada

Calgary, Alberta--(Newsfile Corp. - February 28, 2023) - Baytex Energy Corp. (TSX: BTE) (NYSE: BTE) ("Baytex", the "Company" or "we") today announced that it has entered into a definitive agreement (the "Agreement") to acquire Ranger Oil Corporation (NASDAQ: ROCC) ("Ranger"), a pure play Eagle Ford company (the "Acquisition").

The total consideration to be paid by Baytex, including assumption of net debt, is approximately US$2.5 billion (C$3.4 billion). The transaction has been unanimously approved by the Boards of Directors of Baytex and Ranger and is expected to close late in the second quarter of 2023. Under the terms of the Agreement, Ranger shareholders will receive 7.49 Baytex shares plus US$13.31 cash, for each Ranger common share, for total consideration of approximately US$44.36 per share.

Commenting on the Acquisition, Eric T. Greager, President and Chief Executive Officer of Baytex, said: "The Ranger acquisition is strategic. We are acquiring a strong operating capability in the Eagle Ford, on-trend with our non-operated position in the Karnes Trough and driving meaningful per-share accretion on all metrics. The transaction more than doubles our EBITDA and nearly doubles our free cash flow. The Ranger inventory immediately competes for capital in our portfolio and brings 12 to 15 years of quality oil-weighted drilling opportunities. We are building quality scale and a more durable business with a lower break-even WTI price."

"We are committed to enhancing direct shareholder returns, and through this transaction we are returning more value to our shareholders on a per-share basis. Upon closing of this transaction, we intend to initiate a dividend, which will be a key means of delivering reliable value to shareholders going forward. We are building an even stronger Canadian energy company with a high-quality diversified oil-weighted portfolio across the Western Canadian Sedimentary Basin and the Eagle Ford."

Key Highlights

Accretive on key per share metrics(1), including adjusted funds flow(2) (24%), free cash flow(3)(20%) and production (12%). Allows immediate step-up in direct shareholder returns to 50% of free cash flow. Supports the introduction of a dividend and increased share buybacks. Materially increases Eagle Ford scale while building a quality operating platform in a premier basin. Enhances inventory with 741 net undrilled locations representing an inventory life of 12 to 15 years. Creates a more resilient and sustainable business. Reduces asset level free cash flow break-even price(3)by 15% to US$41/bbl. Increases exposure to premium light oil U.S. Gulf Coast pricing and enhances operating netback. Maintains financial strength with total debt to EBITDA(4)ratio(3)(5)of 1.0x. Supports Baytex's strong commitment to ESG performance with a 16% reduction in average GHG emissions intensity.

(1) Accretion metrics based on the 12-month period from closing, July 1, 2023 to June 30, 2024, and the following commodity prices: WTI - US$75/bbl; MEH premium to WTI - US$2/bbl, WCS differential to WTI - US$17.50/bbl; NYMEX Gas - US$3.50/MMbtu; Exchange Rate (CAD/USD) - 1.35. Based on the weighted average common shares outstanding before and after giving effect to the Acquisition. Pro forma forecast production includes Baytex production of 88,000 to 90,000 boe/d (working interest) and Baytex's internal estimate for Ranger production of 67,000 to 70,000 boe/d (working interest). (2) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information. (3) Specified financial measure that does not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information. (4) EBITDA is calculated in accordance with the credit facilities agreement which is available on SEDAR at www.sedar.com. (5) Total debt to EBITDA ratio based on estimated total debt for Baytex and Ranger on closing, including estimated transaction costs. EBITDA based on the 12-month period from closing, July 1, 2023 to June 30, 2024.

Commenting on the transaction on behalf of Ranger, Darrin Henke, Chief Executive Officer, said: "I couldn't be more proud of the Ranger team and the company we've built together. We expect that combining with the balance sheet strength, deep asset base, and operational excellence of Baytex will create a unique company of scale which will deliver sustained free cash flow growth and differentiated shareholder returns. We look forward to bringing together our complementary teams and assets to realize the long-term value of this combination for our shareholders."

In addition, Edward Geiser, Chairman of Ranger's Board and Managing Partner of Juniper Capital, added, "This transaction represents a leap forward in shareholder value creation potential and accelerates both companies' shareholder return strategies. We expect this combination will create a company that is exceptionally positioned for sustained shareholder returns."

Strategic Rationale

Significant Accretion. The assets are being acquired at an attractive valuation and the Acquisition is immediately accretive to key metrics. Transaction metrics(1)are approximately 2.86x EBITDA(2)at US$75/bbl WTI and $50,000 per barrel of production per day (working interest) which drives 24% accretion to adjusted funds flow per share(3), 20% accretion to free cash flow per share(4)and 12% accretion to production per share. In addition, the Acquisition is 23% accretive to free cash flow per share for the remaining four years of our five-year plan period (2023 to 2026).

Enhanced Shareholder Returns. On closing of the transaction, Baytex intends to increase direct shareholder returns to 50% of free cash flow, introduce a dividend and increase share buybacks. Following closing of the transaction, management expects to recommend that the dividend, to be paid quarterly, be set at $0.0225 per share ($0.09 per share annualized), representing a dividend yield of approximately 1.6%(5)(6). The dividend is expected to be fully funded to US$47/bbl WTI.

Builds Quality Scale and an Operating Platform. The transaction materially increases Eagle Ford scale in Texas while building a quality operating platform in a premier basin. The transaction includes:

162,000 net acres in the crude oil window of the Eagle Ford shale, highly concentrated in Gonzales, Lavaca, Fayette and Dewitt counties and on-trend with Baytex's non-operated position in the Karnes Trough.

Production of 67-70 Mboe/d (working interest) that is 96% operated (72% light oil, 15% NGLs and 13% natural gas).

174 MMboe of proved reserves(7)(consisting of 120 MMbbls of tight oil, 27 MMbbls of NGLs and 162 Bcf of shale gas (working interest before the deduction of royalties).

258 MMboe of proved plus probable reserves(7)(consisting of 180 MMbbls of tight oil, 39 MMbbls of NGLs and 232 Bcf of shale gas (working interest before the deduction of royalties).

Baytex's production is forecast to average 155,000 to 160,000 boe/d (52% light oil, 22% heavy oil, 11% NGLs and 14% natural gas) for the twelve-month period following closing. On a pro forma basis, Baytex is expected to generate annual EBITDA of approximately $2.4 billion(8)and annual free cash flow(4)of approximately $1.0 billion(8).

Enhances Inventory. Baytex estimates 741 net undrilled locations representing an inventory life of 12 to 15 years that immediately competes for capital in the Baytex portfolio. This includes 523 quality Lower Eagle Ford opportunities and 218 additional Upper Eagle Ford and Austin Chalk opportunities. Lower Eagle Ford locations are expected to generate IRRs greater than 75% and payouts of less than eighteen months at US$75/bbl WTI. Baytex believes it can grow production modestly from the acquired assets with two rigs and approximately 50 to 55 net wells per year.

(1) Transaction metrics based on a total transaction value of C$3.4 billion, using the trailing 5-day volume weighted average price as of February 24, 2023 for Baytex trading on all Canadian exchanges, and production of 67 to 70 Mboe/d (working interest) and EBITDA of C$1.2 billion for the 12-month period from closing, July 1, 2023 to June 30, 2024. (2) EBITDA is calculated in accordance with the credit facilities agreement which is available on SEDAR at www.sedar.com. (3) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information. (4) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information. (5) Based on Baytex's closing share price on February 24, 2023 of $5.74. (6) Refer to the Dividend Advisory section in this press release for further information. (7) Ranger's year-end 2022 reserves were evaluated by McDaniel & Associates Consultants Ltd. ("McDaniel"), an independent qualified reserves evaluator, as at December 31, 2022 with an effective date of December 31, 2022, in accordance with National Instrument 51-101 "Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") and the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook"). (8) Based on the 12-month period from closing, July 1, 2023 to June 30, 2024, and the following commodity prices: WTI - US$75/bbl; MEH premium to WTI - US$2/bbl, WCS differential to WTI - US$17.50/bbl; NYMEX Gas - US$3.50/MMbtu; Exchange Rate (CAD/USD) - 1.35.

Creates a More Resilient Business.On a pro forma basis, Baytex's operated production increases to 82% (70% previously) and its asset level free cash flow break-even price(1)improves by US$7/bbl to US$41/bbl WTI. The transaction provides increased exposure to premium U.S. Gulf Coast pricing. Baytex's light oil production in the Eagle Ford increases to 42% of pro forma production (18% previously) which receives WTI plus approximately US$2/bbl price realizations. In addition, there is substantial infrastructure in place with low operating and transportation costs. On a pro forma basis, Baytex's revenue per boe(2)(3)increases 7% and operating netback per boe(1)increases 12%.

Maintains Balance Sheet Strength and Financial Flexibility. On closing of the transaction, Baytex's Revolving Credit Facility will increase to US$1.0 billion (US$850 million previously) and the Company will maintain strong liquidity. Baytex's total debt to EBITDA(4)ratio(1)is forecast to be 1.0x at US$75/bbl WTI. As part of this transaction, Baytex expects to pursue a financing structure which will include senior notes. In conjunction with the Acquisition, Baytex expects to have approximately 40% of net crude oil exposure hedged for the twelve-month period post-closing.

Commitment to Strong ESG Performance. Baytex will continue to pursue ESG excellence while integrating Ranger's assets and operations. The Ranger acquisition reduces Baytex's average GHG emissions intensity by 16%.

Disciplined Leadership and Governance. The combined business will continue to be led by the Baytex executive team and Board of Directors. Baytex intends to add one senior operational leader to the Baytex leadership team and retain the Ranger teams operating in Houston. At closing, Baytex intends to appoint Jeffrey E. Wojahn and one additional independent director from the Ranger Board of Directors to the Baytex Board of Directors.

Enhanced Return of Capital Framework

In conjunction with the closing of the Acquisition, Baytex intends to increase direct shareholder returns to 50% of free cash flow, introduce a dividend and increase share buybacks. This enhanced shareholder return framework is supported by the strong free cash flow accretion from the Acquisition, the creation of a more resilient and sustainable business and a healthy balance sheet.

Following closing of the transaction, management expects to recommend that the dividend, to be paid quarterly, be set at $0.0225 per share ($0.09 per share annualized), representing a dividend yield of approximately 1.6%(5)(6). If declared by the Baytex Board of Directors, the initial dividend is expected to be paid in October 2023 and would represent 4% of adjusted funds flow(7)and 8% of free cash flow(1)at US$75 WTI. The dividend is expected to be fully funded to US$47/bbl WTI.

Following completion of the Acquisition, Baytex's balance sheet will remain a priority with a newly established total debt(1)target of $1.5 billion, representing approximately 1x total debt to EBITDA at US$50/bbl WTI. Upon achieving this total debt level, Baytex intends to increase direct shareholder returns to 75% of free cash flow.

Board of Directors and Management

The combined organization will be led by Eric T. Greager, President and Chief Executive Officer of Baytex and the Baytex leadership team. Baytex intends to add one senior operational leader to the Baytex leadership team and retain the Ranger teams operating in Houston. At closing, Baytex intends to appoint Jeffrey E. Wojahn and one additional independent director from the Ranger Board of Directors to the Baytex Board of Directors.

Transaction Details

Under the terms of the Agreement, Ranger shareholders will receive 7.49 Baytex shares plus US$13.31 cash, for each Ranger common share, for total consideration of approximately US$44.36 per share. This represents a 7.6% premium based on the five-day volume weighted average price of Baytex.

The total transaction value is approximately US$2.5 billion (C$3.4 billion), including net debt(7)of approximately US$650 million estimated on closing. The cash portion of the acquisition is expected to be funded, in part, through expanded credit facilities and the issuance of debt securities.

(1) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information. (2) Based on the 12-month period from closing, July 1, 2023 to June 30, 2024, and the following commodity prices: WTI - US$75/bbl; MEH premium to WTI - US$2/bbl, WCS differential to WTI - US$17.50/bbl; NYMEX Gas - US$3.50/MMbtu; Exchange Rate (CAD/USD) - 1.35. (3) Revenue per boe is calculated as petroleum and natural gas sales divided by barrels of oil equivalent production volume for the applicable period. (4) EBITDA is calculated in accordance with the credit facilities agreement which is available on SEDAR at www.sedar.com. (5) Based on Baytex's closing share price on February 24, 2023 of $5.74. (6) Refer to the Dividend Advisory section in this press release for further information. (7) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information.

In connection with the Acquisition, Baytex has entered into a debt commitment letter with Canadian Imperial Bank of Commerce ("CIBC"), Royal Bank of Canada ("RBC") and The Bank of Nova Scotia ("BNS") to provide aggregate debt commitments of US$1.75 billion, which are expected to be comprised of a US$1.0 billion revolving credit facility ("Revolving Credit Facility"), a US$250 million term loan ("Term Loan") and a US$500 million 364-day bridge facility ("Bridge Facility"). The Bridge Facility will provide financing to backstop an anticipated issuance of new debt securities prior to closing of the Acquisition. The debt commitments provide Baytex with the ability to optimize its capital structure, which includes the redemption of Ranger's outstanding senior notes, while maintaining adequate go-forward liquidity.

The transaction is subject to the approval by a majority of the votes cast by the holders of Ranger's common stock at a special meeting of the Ranger stockholders held for that purpose. Affiliates of Juniper Capital Advisors ("Juniper") own approximately 54% of Ranger's common stock and have entered into a support agreement with Baytex pursuant to which Juniper has agreed to vote all of the Ranger common stock it owns in favour of the transaction.

The closing of the Acquisition is subject to the satisfaction of customary closing conditions, including the approval by Baytex's shareholders of the issuance of Baytex shares as consideration for the Acquisition, approval by the holders of Ranger's common stock, the expiration of the waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Baytex's Registration Statement becoming effective under the U.S. Securities Act of 1933, as amended, and the Baytex common shares issued pursuant to the Agreement being approved for listing on the New York Stock Exchange and the Toronto Stock Exchange.

Baytex Pro Forma

Notes: (1) Based on Baytex's closing share price on February 24, 2023 of $5.74. (2) Pro forma enterprise value based on estimated net debt on closing, inclusive of transaction costs. Enterprise value is calculated as market capitalization plus net debt and is used to assess the valuation of the Company. (3) Pro forma production includes Baytex production of 88 to 90 Mboe/d (working interest) and Baytex's internal estimate for Ranger production of 67 to 70 Mboe/d (working interest). (4) Based on the 12-month period from closing, July 1, 2023 to June 30, 2024, and the following commodity prices: WTI - US$75/bbl; MEH premium to WTI - US$2/bbl, WCS differential to WTI - US$17.50/bbl; NYMEX Gas - US$3.50/MMbtu; Exchange Rate (CAD/USD) - 1.35. (5) EBITDA is calculated in accordance with the credit facilities agreement which is available on SEDAR at www.sedar.com. (6) Capital management measure. Refer to the Specified Financial Measures section in this press release for further information. (7) Specified financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other entities. Refer to the Specified Financial Measures section in this press release for further information. (8) Reserves of Baytex and Ranger are working interest reserves as of December 31, 2022, as evaluated by McDaniel, an independent qualified reserves evaluator, with an effective date of December 31, 2022. The pro forma reserves are the sum of the two reserves reports. Baytex did not construct a consolidated reserves report of the combined assets and did not engage McDaniel to produce such a report. The actual reserves of the combined company, if evaluated as of December 31, 2022, may differ from the pro forma reserves presented. See the Advisory Regarding Oil and Gas Information section in this press release for a summary of reserves by product type.

2023 Guidance

Following closing of the Acquisition, Baytex will provide revised guidance for full-year 2023. The guidance will include a full update incorporating the Acquisition and any modifications to Baytex's current asset plans.

Lock-Up Period

At closing, Baytex will enter into a hold period agreement with Juniper. Of the Baytex shares issued to Juniper, one-third will be subject to a three-month escrow period, one-third will be subject to a six-month escrow period and one-third will be subject to a nine-month escrow period.

Financial and Legal Advisors

CIBC Capital Markets and RBC Capital Markets are acting as financial advisors to Baytex. CIBC Capital Markets has also provided a verbal opinion to Baytex's Board of Directors to the effect that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the consideration to be paid by Baytex, pursuant to the Acquisition, is fair from a financial point of view to Baytex. Scotiabank is acting as strategic advisor to Baytex. Vinson & Elkins LLP and Burnet, Duckworth & Palmer LLP are serving as Baytex's legal counsel.