In this series, I (Jin Choi) talk about my goal of reaching $1 million in my TFSA account by 2033. If you want to know what a TFSA is, I recommend you read my free book.
June Results: Up 1.8%
At the end of June, I had $66,303 in my TFSA account, which was up by 1.8% since the start of the month. By comparison, the Canadian stock market went up by 1.7% while the U.S. stock market went up by 2.7% in Canadian dollar terms. Therefore, my portfolio underperformed the broader market.
The majority of my portfolio consists of oil and gas stocks. In June, oil prices jumped from $66.98/bbl to $74.13 (in US dollars). Such a big jump should have brought about a bigger increase in the value of my oil stocks. But as we’ve seen already, oil stocks don’t always behave rationally.
One stock that I felt didn’t behave rationally was Baytex (Ticker: BTE). Baytex is an oil producer that operates in both the U.S. and Canada, and it’s a significant holding in my TFSA portfolio.
On June 18, Baytex announced that it would buy another Canadian oil company called ‘Raging River Exploration’ for about $1.4 billion, which it’ll pay for by issuing new stock. In effect, all Raging River shares will transform into Baytex shares if the deal goes through.
The stock prices of both companies tanked on announcement. Baytex shares fell from $5.10/share to $4.47/share on the day of the announcement, while Raging River’s shares fell from $6.28/share to $5.65/share. No other news broke that day, and oil prices in fact rose, so the declines in both stocks were solely due to the announcement.
If you think about this rationally, the stock price declines don’t make any sense. The declines imply that investors think the combined company is worth substantially less than they are as separate entities. But the assets and profit generating potential of both companies have not changed. If anything, the combined company could be worth slightly more by eliminating duplicate overhead costs.
Now, I understand to a point what investors of each company might be saying. Baytex investors might be upset that the company is issuing shares when they’re so cheap to buy a more expensive company. In effect, Baytex investors may believe they’re getting a raw deal.
On the other hand, Raging River investors might believe they should have gotten a higher valuation for their company. They were hoping for a bigger company to pay something like a 30% premium to the recent stock price, not the 10% premium offered by Baytex. In other words, Raging River investors may feel they’re getting a raw deal.
The problem is, it’s impossible for both these sets of investors to have gotten a raw deal. Deals like this are a zero sum game. If one set of investors is getting a terrible deal, the other set of investors is getting a sweet one. Judging by the reaction of both sets of investors, my guess is that the deal is close to fair for both sides.
Thanks to the deal’s announcement, Baytex stock is trading at the same level it was at back when oil was roughly $40/barrel. It’s hard not to see that Baytex is cheap, even if Baytex shareholders are getting the worse end of the deal.