Baytex Energy Corp. (TSX:BTE) expects to further improve its performance in 2018, driven by increased production and by implementing cost-cutting initiatives
SmallCapPower | May 8, 2018: Baytex Energy Corp. (TSX:BTE) (NYSE:BTE) is a mid-tier oil and gas company based in Calgary, Alberta, with assets in the Western Canadian Sedimentary Basin and in the Eagle Ford in the United States. Baytex delivers sector-leading capital efficiencies of ~$12,000 per boe/d and return on revenues (RORs) of over 50% across its three core assets – Eagle Ford, Peace River, and Lloydminster.
As can be seen from the chart below, there is a high correlation between WTI crude prices and the stock price of Baytex Energy. We believe if the WTI price can be sustained at current levels, or move up further above US$70, Baytex’s fundamentals would improve significantly, leveraging strong growth in its free cash flow.
WTI crude prices and Baytex share price (TSX)
Since our first report in July 2017, the stock price of Baytex Energy has surged more than 80% to $5.75 on the TSX (as of April 30, 2018), while the price of WTI has risen 45% to trade at three-year highs of ~$68.5/bbl. There exists potential for oil prices to go much higher on growing global demand, as well as restricted production output by OPEC.
Baytex Energy delivered a strong financial performance in 2017 on the back of climbing oil prices. The Company expects to further improve its performance in 2018, driven by increased production and by implementing cost-cutting initiatives. We believe Baytex Energy should benefit immensely from a rising crude oil price, with ability to report significant cash flows if the WTI oil price can be sustained above US$70 per barrel.
Despite the sharp run up, shares of Baytex Energy look undervalued, as indicated by a modest EV/EBITDA multiple of 6.1x, below its peer average of 6.8x.
Investment thesis
- Industry-leading capital efficiencies and free cash flows above a US$55/bbl WTI crude oil price
- Strong liquidity to fund 2018 capex
- 2017 results at the top end of management’s guidance
Industry-leading capital efficiencies and free cash flows above US$55 WTI
Baytex Energy achieved sector-leading capital efficiencies of ~$12,000 per boe/d ($11,500 per boe/d mid-2017) and RORs of over 50% across its three core assets. Importantly, the Company generates positive free cash flows above a US$55/bbl WTI crude price. At the current WTI price of ~US$70/bbl, free cash flows are estimated to be more than $200 million/year. These free cash flows could be invested in repaying debt, as well as potential acquisitions. 
Adequate liquidity
As of Q4 2017, Baytex Energy had 70% of its $575 million credit facility undrawn, with the first meaningful long-term note maturing in 2021. Net debt stood at a $1.73 billion ($1.77 billion in 2016), or about 40% of shareholders’ equity. We believe the Company has sufficient capital to fund $325-$375 million in E&D capex guided for 2018.
2017 results at the top end of management’s guidance
Greater production, coupled with higher oil prices, helped Baytex Energy report 2017 net income of $87 million, or $0.37 per diluted share, compared to a net loss of $485 million, or $2.29 per diluted share, in 2016. Strong well performance resulted in 2017 average production of 70,242 boe/d, exceeding the high end of guidance (69,500 – 70,000 boe/d), and up 8% from Q4/2016 exit production. For reference, average realized sales price increased to $40.58/boe in 2017 from $30.29/boe in 2016.
While operating expenses were in line with management’s guidance at $10.5/boe, G&A expenses were better than the Company’s $2.0/boe forecast, at $1.85/boe. Adjusted funds flow was $348 million, which exceeded capital expenditures by $21 million.
Capex in new high-quality assets to drive 2018 earnings
For 2018, Baytex Energy is guiding $325-$375 million in capex in high-quality assets that are expected to generate 50% – 85% RORs. Judicious capital allocation would result in 2018 capital efficiencies of $12,000 per boe/d and drive 2018 exit production growth of 6% to 72,000-73,000 boe/d. Eagle Ford would get the highest allocation at 55%, with an internal rate of return (IRR) expected at 85% at US$60/bbl WTI.
Capital deployment in 2018
Outlook and valuation
Baytex Energy is a mid-tier oil and gas producer that continues to benefit from rising oil prices. Since our first report in July 2017, the share price of Baytex has surged more than 80% while the price of WTI has risen 45% to trade at three-year highs of ~$68.5/bbl. There exists potential for oil prices to go much higher on growing global demand, as well as restricted production output by OPEC. Baytex delivered a strong financial performance in 2017 on the back of climbing oil prices. The Company expects to further improve its performance in 2018, driven by increased production and by implementing cost-cutting initiatives. We believe Baytex Energy could benefit immensely from rising crude oil prices, with ability to report significant cash flows if prices can be sustained above US$70 per barrel.
Baytex – Comparable Valuation
Despite the sharp run up, shares of Baytex Energy look undervalued, as indicated by a modest EV/EBITDA multiple of 6.1x, below its peer average of 6.8x.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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