Holders of Aurora, based in Perth, Australia, will receive A$4.10 ($3.67) a share, Baytex said in a statement yesterday. The deal represents a 56 percent premium to Aurora’s closing price of A$2.62 yesterday, the lowest level since October 2011.
The acquisition, which will allow Baytex to add output from the Eagle Ford shale formation in Texas, follows purchases by the producer in North Dakota’s Bakken and Three Forks shale formations. It will boost the Calgary-based company’s production of higher priced light oil, in lieu of the heavy oil that currently accounts for 75 percent of output.
The purchase may signal an imminent rise in deals in the Canadian oil and natural gas industry as company valuations are low and there’s a need to replace production, said David Neuhauser, a portfolio manager at Livermore Partners Inc. in Northbrook, Illinois. “A deal like this shows you some of the bigger companies are definitely on the lookout for acquisitions.”
Aurora jumped 56 percent to A$4.09 at the close in Sydney, the biggest increase in almost 13 years. Baytex fell 4.6 percent to C$39.72 in Toronto. The acquisition, which Baytex is financing with a C$1.3 billion equity offering and existing credit facilities, also includes about C$744 million in assumed debt.
“It’s a big deal on good assets at an attractive price,” Sam La Bell, an analyst at Veritas Investment Research Co. in Toronto, said in an e-mail. “The market may take time to digest this one.”
Canadian producers have struggled with lower prices for heavy crude amid a shortage of export pipelines to bring their supply to refiners. Baytex is among the biggest users of trains to avoid bottlenecks and last month set a target that 57 percent of its output this quarter would move by rail. Canadian heavy oil averaged $24.50 a barrel less than the main U.S. benchmark last year, according to data compiled by Bloomberg.
“The Eagle Ford play provides not only exposure to light oil, but also to Gulf Coast crude oil markets with established transportation systems,” James Bowzer, chief executive officer of Baytex, said in the statement.
Increasing output from shale formations such as the Eagle Ford has helped U.S. oil production rise to the highest level since 1988. The nation is set to propel past Saudi Arabia as the world’s largest supplier in 2015.
Eagle Ford oil production in the first 11 months of last year was up more than 4,000 percent from 2010, according to the Railroad Commission of Texas. Oil and gas companies are forecast to spend $23 billion in the area in 2014, $5 billion less than last year because of increased efficiency, consultants Wood Mackenzie Ltd. said in a report.
“It’s probably one of the most expensive deals done in the Eagle Ford, but we think it should certainly have gone at a significant premium to other deals because of the high-quality nature of the resource,” Nik Burns, a Melbourne-based analyst at UBS AG, said by phone.
Bowzer, who took over as CEO in 2012, previously oversaw Marathon Oil Corp. (MRO)’s Eagle Ford operations as vice president for North America. Marathon operates the majority of Aurora’s Eagle Ford acreage.
There is a “low” potential for another bidder for Aurora, Andrew Williams, an analyst at RBC Capital Markets in Sydney, wrote in a research note. The offer price and fact that Aurora largely doesn’t operate its Eagle Ford lands probably precludes other bidders from emerging, Williams said.
The deal is expected to close in mid to late May and requires approval from Aurora shareholders, as well as approval by the courts, Australian regulators and under U.S. antitrust legislation, according to a statement from Aurora.
Scotia Waterous advised Baytex on the deal. Legal advisers were Burnet, Duckworth & Palmer LLP, as well as Paul, Weiss, Rifkind, Wharton & Garrison LLP and Norton Rose Fulbright. Credit Suisse Group AG and Goldman Sachs Group Inc. were financial advisers to Aurora (AUT) and Gilbert + Tobin acted as legal adviser.
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