Baytex Energy generates free cash flows (FCF) if the WTI crude price stays above US$50/barrel
SmallCapPower | July 7, 2017: Over the past two weeks, the WTI crude price has rebounded nearly 11% to US$47.10 per barrel as of June 4, 2017, from the low of US$42.50 on June 21, 2017. This sharp rebound presents an opportunity for investors to look at beaten down and attractively-valued energy stock Baytex Energy Corp. (TSX: BTE), which has also rallied more than 10% from its 21st June low of $2.39 and boasts of superior capital and operational efficiencies. We believe Baytex Energy could benefit immensely from rising crude prices, with ability to report significant cash flows if prices sustain above US$55 per barrel.
As can be seen from the chart below, there is a high correlation between WTI crude prices and the stock price of Baytex. We believe any movement in WTI crude above US$50 would result in appreciation of the Baytex Energy share price, underpinned by improvement in its fundamentals including net income and free cash flows.
WTI Crude Price and Baytex Share Price
Source: Bloomberg
Based in Calgary, Alberta, Baytex Energy Corp. is engaged in the acquisition, development and production of crude oil and natural gas. The Company production is 79% weighted toward crude oil and natural gas liquids. Baytex Energy is currently focused on production on three key oil resource plays – the Eagle Ford in Texas, the Peace River Oil Sands and Lloydminster heavy oil.
Investment thesis
High-quality oil assets with industry-leading capital efficiencies and robust returns across all three plays
Demonstrated growth in production and reserves
Adequate liquidity position
Capital efficiencies and free cash flows above US$50 crude prices
Baytex Energy holds superior quality assets and achieved sector-leading capital efficiencies of $11,500 per boe/d and > 50% ROR’s across our three core assets at US$50/bbl WTI crude price. The breakeven WTI price is only $30 for its Eagle Ford play and ~$40 for its other two (Peace River Oil Sands and Lloydminster heavy oil) plays.
Baytex Energy generates free cash flows (FCF) if the WTI crude price stays above US$50/barrel. According to the Company’s own estimates, at US$55 crude price, FCF would be ~$70 million and could reach $140 million at $60 crude price and $180 million at $65 crude price. These free cash flows could be invested in repaying debt and for organic development purposes.
Adequate liquidity
As of 1Q17, Baytex Energy has nearly two-thirds of its $575 million credit facility undrawn, with first meaningful long-term note maturing only in 2021. As of 1Q17, net debt stood at a reasonable $1.8 billion, or about 50% of shareholder’s equity. We believe the Company has sufficient capital to fund $325-$350 million in E&D capex guided by Baytex Energy for 2017.
Production increases 11% in 1H17
Baytex Energy noted an 11% increase in production from Q4/16, with 15% coming from Eagle Ford and 7% from the Canada operations. The Company continues to increase pace of development in the Eagle Ford, along with focus on cost efficiencies across all three plays.
Reports profitable 1Q17 on higher crude prices
Riding on a 55% jump in average WTI crude prices to US$51.91/bbl, Baytex Energy reported strong growth in revenues, funds from operations and net income for 1Q17. Revenues rose 70% YoY to $260.5 million during the quarter despite a 9% drop in production (69,298 boe/d vs 75,776 boe/d) owing to strong growth in realized sales prices of $40.2/boe versus $21.93 in the prior year quarter. Funds from operations doubled to $81.4 million from $45.6 million. Baytex Energy reported net income of $11.1 million, or $0.05 per share, compared to $0.6 million in the prior year quarter and net losses in the past three quarters (4th, 3rd and 2nd quarter of 2016).
Source: Company filings
Comparable analysis
Baytex Energy is a mid-tier oil and gas producer with ~$780 million in revenues in 2016. As per Bloomberg consensus, Baytex Energy revenues are estimated to grow at 20% in 2017. In terms of valuation, the Company trades at the lower end of the EV/EBITDA multiple at 6.07x. The 12-month consensus price target as per Bloomberg is $5.11, an upside of 63% from the July 4th closing price of $3.13.
Comparable analysis
Baytex Energy is a mid-tier oil and gas producer with ~$780 million in revenues in 2016. As per Bloomberg consensus, Baytex Energy revenues are estimated to grow at 20% in 2017. In terms of valuation, the Company trades at the lower end of the EV/EBITDA multiple at 6.07x. The 12-month consensus price target as per Bloomberg is $5.11, an upside of 63% from the July 4th closing price of $3.13. 
Source: Bloomberg
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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