Baytex's Production Model Should Help Fuel Future Growth

by Ted Leinbach

With the recent market volatility rocking the financial markets, one source of income that investors can take advantage of is dividends.

It’s why we want to turn your attention to our Northern neighbor whose energy trusts are paying handsome monthly dividend distributions right now to shareholders.

Baytex Energy Trust (NYSE: BTE) is one energy trust of note.

Baytex is a conventional oil and gas income trust with the majority of its operations located in the rich Western Canadian Sedimentary Basin. But we’re interested in income, and it delivers; BTE produces a healthy 13.2% yield.

It has 12.3 years of proven plus probable reserves. Heavy oil is the main asset in BTE’s portfolio, making up 60% of the company’s output. And since heavy oil has very low exploration and development costs, BTE can rebuild its reserves inexpensively, as they are depleted.

Baytex’s low cost production model sets it apart from other leading firms in the industry, and should help fuel its future growth.

Baytex Energy’s Peace River Oil Sands Project

Their Peace River Oil Sands Project in Northern Alberta, also known as “Seal”, is one of their capital projects investors are quickly starting to take notice of. With 67,000 net acres of long-term oil sands leases at Seal, its estimated resource potential is 50 million barrels of oil.

And BTE has plans to convert Seal into a commercial-scale thermal project within the next three years, which will offer the trust higher rates of return.

This project will add a significant amount of value for shareholders over time and the market is starting to recognize that.

BTE is also using acquisition to fuel growth. The firm acquired Burmis Energy Inc., a junior exploration and production company headquartered in Alberta, Canada, a move that will boost Baytex’s daily oil production and improve their product mix.

The trust continues to increase its reserves with strategic acquisition and capital programs. And the result of BTE’s strategic moves is cash… and plenty of it. Cash flow from operations has increased nearly five-fold during BTE’s history as a trust.

Bottom line: BTE is a trust that has a proven operational and financial track record with industry-leading capital efficiencies. Its balance sheet is strong. Debt-to-cash flow is less than one-third of what it was in 2004. And with the stock trading at levels not seen in years, now is the perfect time to consider adding BTE in your portfolio. If energy prices take another jump, investors will be handsomely rewarded.

Comments

[elliot_mllr:]

BTE's management is very good, but to commercialize the Canadian oil sands profitably requires a far higher price for light, sweet crude (since heavy oil trades at a discount to it) than $42. Probably $60 is more like it.

Jan 31 11:04 AM

[Correctamundo:]

Todd, good article. But, how is BTE preparing to handle the loss of its partnership tax status in 2011(?) as a result of the Canadian government's decision to abolish preferential tax treatment for partnerships? I think this decision is a large Damocles-type of sword hanging over all the Canroys (Canadian partnership oil & gas companies).

Feb 01 12:11 AM

[PeteK:]

The Canadian gov. not only abolish the preferential tax treatment, but also
will tax the hell out of the dividends.
Not good.

Feb 01 02:10 AM

[Correctamundo:]

Ted, can you comment on the concerns that PeteK and I raised about the change in Canadian tax policy and the impact to BTE? I don't understand how you can provide a recommendation on a stock without looking at these near-term issues.

Feb 22 06:18 PM