Welcome to the joint conference call of Baytex Energy Corp. and Raging River Exploration Inc. As a reminder, all participants are in listen-only mode. After the conference call, there will be an opportunity to ask questions. I would now like to turn the conference over to Brian Ector, Senior Vice President, Capital Markets and Public Affairs of Baytex Energy. Please go ahead, Mr. Ector.
Thank you, Ariel. Good morning, ladies and gentlemen, and welcome to the call related to the transaction that we've announced this morning. With me, I have Ed LaFehr, President and Chief Executive Officer of Baytex Energy, and Neil Roszell, Chief Executive Officer and Executive Chairman of Raging River Exploration. We are very pleased to be discussing this transformative business combination between Baytex and Raging River, and in addition to this call, we have posted a presentation outlining key points of the transaction on both our website at baytexenergy.com and on Raging River's website at rrexploration.com. While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to our advisories regarding forward-looking statements, non-GAAP financial measures, and capital management measures, and oil and gas information in today's press release.
All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified. I would now like to turn the call over to Ed.
Thanks, Brian, and good morning, everyone. We appreciate you joining us on such short notice. Earlier this morning, Baytex and Raging River issued a joint press release announcing the strategic combination of the two companies, creating a top-tier North American oil producer that possesses an extraordinary portfolio of high-return oil assets, a well-capitalized balance sheet, a strong growth profile and free cash flow, and an enterprise value of $5 billion. As you likely saw in the joint press release, our two companies are merging to create an oil company with estimated 2019 production greater than 100,000 BOEs per day and approximately $1 billion of adjusted funds flow at a WTI price of $65 per barrel. The pro forma entity will be financially strong, with an estimated net debt to adjusted funds flow ratio of 1.9 times at year-end 2019.
I'm really excited to unleash this new, powerful combination of assets and people that share a highly aligned strategy and culture of operational excellence and innovation. Our vision is to build this top-tier North American oil company through disciplined growth and returns to shareholders. The new company will be a self-funded business model focused on per-share growth, targeting a 10%-15% total return to shareholders while driving our net debt to adjusted funds flow ratio down to 1.5 times. We will also build on our asset quality and operating excellence through a combination of accelerating activity, particularly in the East Duvernay light oil play, accretive acquisitions in core areas, and mitigating our decline rate to less than 30% over time. We believe the combination of these two high-quality and complementary oil companies is a unique and compelling opportunity for shareholders.
With that, I will hand the call over to Neil, who will review with you some of the key elements of this transaction that we are both incredibly excited about.
Thanks, Ed. Good morning, everyone. This is a truly compelling combination that creates an even stronger company. It's better positioned for value creation, well beyond what either of our companies could do on a standalone basis. It combines the two teams with highly aligned goals and a great deal of mutual respect. The pro forma entity is a well-capitalized oil producer that has exceptionally strong producing assets and high-return development opportunities with the scale to advance our East Duvernay oil shale development. The combined team is ideally positioned to deliver attractive growth, free cash flow, and superb long-term value creation. The merger is accretive to the shareholders of Raging River on an adjusted funds flow basis, and the combination with Baytex is an excellent outcome to the comprehensive strategic repositioning process that was undertaken by our board of directors and publicly announced on March 5, 2018.
Let me also discuss some key elements of the transaction. Under the terms of the arrangement, each Raging River shareholder will receive 1.36 common shares of Baytex for each common share of Raging River owned. The exchange ratio was determined based on the market trading levels of Baytex shares and Raging River shares at the times the companies entered into exclusive negotiations. The board of directors of Baytex and Raging River have unanimously approved the arrangement, received fairness opinions from their respective financial advisors, and have recommended that their shareholders vote, in the case of Baytex, in favor of the issuance of Baytex shares under the arrangement, and in the case of Raging River, in favor of the arrangement. The arrangement remains subject to customary closing conditions, and it's expected to close in August 2018. The arrangement also includes mutual non-completion fees of CAD 50 million.
The combination will be led by Ed as CEO, Mr. Rick Ramsay as Chief Operating Officer, and Mr. Rod Gray as Chief Financial Officer. I'm pleased to announce that Mr. Bruce Beynon, the current president of Raging River, will join Baytex as the Executive Vice President with responsibility for exploration, land, and corporate development. I'm also pleased that Mr. Jason Jaskula, our current Chief Operating Officer of Raging River, will join Baytex as the Vice President of the East Duvernay Shale Oil Play. In addition, the majority of the Raging River management team and staff will have key roles in the combined entity. I will serve as Chairman of Baytex, and Raymond Chan, the current chairman of Baytex, will serve as Lead Independent Director, while the remainder of the combined company's Board of Directors will be comprised of members from both Baytex and Raging River's current board.
Again, I'm confident that the combined company is ideally positioned to deliver long-term growth and shareholder returns. I would like to now turn the call back over to Ed, who will give you more detail on the strategic combination.
Thanks, Neil, and as you can tell, both of us are very enthusiastic about the merger. Let me now give you a flavor for how this combination brings together a premium asset portfolio capable of generating both attractive growth and free cash flow. The combined company's world-class asset base has significant size and scale, with pro forma 2018 exit production of 97,000-99,000 BOEs per day, of which 85% is oil and liquids from a highly complementary footprint in top-tier plays, including the Viking, Peace River, and Lloydminster in Canada and the Eagle Ford in Texas. In addition, we are excited about the emerging East Duvernay shale oil play, where the combined company holds a 100% working interest in 260,000 net acres of contiguous lands and is optimally positioned to unlock its potential.
This diverse portfolio of oil assets, with over 10 years of low-risk drilling inventory, is capable of providing 5-10% annual production growth while also generating free cash flow. The financial strength and free cash flow of the combined entity will enable us to optimize our capital investment program across five high rate of return oil assets. In 2019, the combined company is forecasting a capital program of CAD 800 million, consisting of sustaining capital of CAD 575 million and growth capital of CAD 225 million, which includes an expanded East Duvernay shale capital program to build on recent exploration success. This capital program is designed to deliver 2019 average annual production of 100,000-105,000 BOEs per day, representing 8% growth over 2018 pro forma annual production.
At a WTI price of $65 per barrel, the producing asset base generates approximately $1 billion of adjusted funds flow and $200 million of free cash flow, net of sustaining and growth capital, which will initially be targeted towards debt repayment. The combined company will have a strong balance sheet and a pro forma net debt to adjusted funds flow ratio of 1.9 times at year-end 2019. Along with the significant free cash flow potential I just highlighted, the new entity is well-positioned to pursue a blend of organic growth, debt reduction, strategic acquisitions, and/or reinstate a dividend in the future.
Additionally, the combined company's strong liquidity position is underscored by the fact that its first long-term note maturity is not until 2021, and its $575 million revolving credit facilities are covenant-based, mature in June of 2020, and do not require annual or semiannual reviews. We are well within the financial covenants of these facilities. The ability to generate both growth and free cash flow stems from the high return, quick payout nature of the combined company's oil development inventory, which offers before-tax internal rates of return of 50%-110% and payouts of 6-18 months. Furthermore, the combined company's diversified portfolio with exposure to Canadian light oil, Canadian heavy oil, and U.S. light oil provides enhanced ability to select the best projects and optimize capital allocation in order to maximize returns on invested capital.
Our combined top-tier team, with a strong track record of execution, aligned strategy, and a culture of operational excellence and innovation, is well-positioned to build on the operational momentum in the second half of 2018, and with that, I will turn the call back over to Neil for some closing remarks.
Thanks, Ed. Hopefully, everyone on the call today can see why the merger of Baytex and Raging River, two leading oil-focused companies, excites Ed, myself, our boards of directors, and all of the executives that have been involved in the negotiations. This is a rare opportunity where we know each other so well that they have the potential to achieve something much greater than the sum of the parts, and I'm looking forward to being a big part of it. Ed and I are totally aligned on our new vision. We are creating an oil-producing company, which will offer shareholders a combined total return of 10%-15%. This will be a new company which can self-fund growth while continuing to improve its balance sheet.
We have combined a superior blend of assets and product pricing in the best jurisdictions in North America, and we are incredibly excited that we have the ability to accelerate the Duvernay light oil development. The strategic fit is compelling, and just as important, this transaction combines two teams with highly aligned strategy and culture. The transaction strongly enhances the outlook to generate meaningful growth and returns for shareholders over the long term. That will conclude our formal remarks, and we'll ask the operator to open the call for questions.
Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Greg Pardy of RBC Capital Markets.
Thanks. Thanks. Good morning. Three quick ones for me, maybe just the first for Ed, and I think I know the answer to the question, but is it fair to say then that the portfolio, the balance of the portfolio is gonna remain intact, i.e., that you would not be looking at this stage, post this deal, to be loading down the Eagle Ford?
... I think that's a good question, because I have been talking about that publicly as a potential to deleveraging the company. But what I would say at this point is we are very cored up. This company now possesses these five oil assets, including the Duvernay, which is poised for growth, but all of these oil assets have growth potential. Our strategy going forward would be to essentially run the Viking and the Eagle Ford for free cash flow and maximize those returns, focus on capital efficiency, and then grow the Canadian heavy business as well as the, in particular, the East Duvernay light oil play. But all of this is kind of go forward plans that we have to put together. We have an aligned strategy, but I would say that it definitely puts Eagle Ford dilution on the back burner.
Okay, great. And then just maybe the other two, almost to some extent, for modeling purposes. But, how should we be thinking just about, G&A on a combined basis? And then, what is the-- what does the natural decline rate look like for the combined entity as well? Thanks.
Let me take the natural decline rate because we know it pretty well. The Viking is 40%, Eagle Ford is 40%, Canada is 20%, the Canadian heavy properties are 20%-24%. So that puts us, the old Baytex corporate decline is about 32%, and this moves us up to 35%, essentially. So there's a lot of opportunity, though, around waterflood and things that are happening in the business, that decline rate is expected to come down, as I said in my remarks. On G&A, I think it's too early to tell, but this is not a merger where we have a strong overlap of assets and overlap of people in offices.
I would say the vast majority of staff, which we've talked about in both entities, will be required to take the company forward. And we have a great team, and we'll build around that. But Raging River are one of the top, low-cost operators that I've seen in the space, and we're sitting at CAD 1.70 G&A per barrel, so I would think the blend would be around CAD 1.50-ish. Yeah, I would agree with that.
Okay, great. Thanks very much.
Our next question comes from Phil Skolnick of Eight Capital.
Yeah, thanks. Good morning. Just following up on Greg's question around Eagle Ford dilution then. Are you happy now with where the balance sheet would be with that, with respect to the 1.7 , 1.9 times? Or do you want-
I think I said. Our vision is certainly to bring it down into the peer group, into the top part of the peer group, which would be 1.5 times debt to cash flow. So we do want to bring it down. We think we can do that fairly readily. So, I don't think we need Eagle Ford dilution to do that. On the other hand, when we combine our bigger brain and pull ourselves together, Eagle Ford dilution is still an option that's out there. I like being an operated company as opposed to a non-operated company, and this moves us now to well north of 60% operated, 65% operated. So, you know, continuing on that journey is certainly in our sights.
Okay, thanks. So you're saying 1.5 times debt to cash flow you can get fairly readily, is that, you know, something based on outlook of, you know, with LLS pricing and things like that? Or is there other means to get you down there, if not Eagle Ford dilution?
I think this is Neil, kind of responding, and Ed, to welcome to chime in. I think organically, we believe with the growth opportunities we see in the combined asset base and the, you know, the free cash flow above our growth capital that we see in a very organic model without selling assets or purchasing additional assets, we see that trend migrating down to that top peer level within a couple of years. Not to say that we, as a combined entity, won't pursue that quicker, but we don't see a compelling need beyond organically what we have to do anything quick to, to deal with that, because it will be trending down towards that top tier level of our peer group, over the next, 12 to 24 months.
Agree fully.
All right. Thanks a lot. That helps.
Our next question comes from Robert Ellenbogen of Credit Suisse.
Hi, good morning. Thanks for taking my question. I just wanted to confirm your understanding of whether or not this deal is a change of control under the four Baytex bonds. I believe all the notes have a 50% change in control trigger that looks like it may have been met, and then the 2022s and 2024s have an additional ratings trigger. Have you spoken with the agencies, and what are your thoughts on change of control overall, across the four notes? Thank you.
Sure. This is Rod speaking. We did look at that in detail and basically have looked at that fairly extensively, and our view would be that a change of control has not been occurred or has not occurred with this transaction. And we would be keeping those bonds, both the 2014s and the 2011s, in respect to the indentures in place going forward.
Got it. Okay, thank you very much.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Ector for any closing remarks.
Thanks, Ariel. Thanks, everyone, for participating in today's call, and we look forward to chatting again soon.
Thank you.