Baytex Energy Corporation (BTE) is a dividend-paying oil and gas development and exploration company based in Calgary, Alberta, Canada. Approximately 87% of Baytex's production is weighted toward crude oil. BTE was formerly a Canadian royalty trust (aka CANroy), and like its peers, has switched its corporate structure to that of a dividend-paying corporation. This article analyzes BTE's recent quarterly results as well as its 2012 year-end reserve data. A comparison of various valuation metrics to three peer companies (Enerplus Energy (ERF), Pengrowth Energy (PGH), and Penn West Petroleum (PWE)) reveals that BTE is overvalued on a relative basis. For this reason, one should sell BTE in favor of any of the three aforementioned companies.
In the 4th quarter of 2012, BTE reported funds flow from operations (FFO) of 127M CAD. This number represents the funds generated by a company before changes in working capital and remediation expenditures. Based on 122M shares outstanding, this represents FFO per share of $1.04 CAD. Using the April 5th closing price of $41.74 CAD per share, BTE currently trades at a multiple of 10.0 times annualized FFO. A comparison of BTE's quarterly earnings to the three peer companies is shown below. PGH, ERF, and PWE trade at a multiple of share price to annualized FFO of 3.3, 3.4, and 4.1, respectively. On an earnings basis, BTE is between 2 and 2.5 times more expensive than the three peer companies.
|cash flow (MM)||127||190||200||295|
|FFO per share||1.04||0.37||1.01||0.62|
BTE also had capital expenditures in the quarter of 113M CAD, which resulted in negative free cash flow of -$0.54 CAD per share. It should be noted that of the four companies, only PGH featured positive free cash flow for the quarter of $0.07 CAD per share.
At year end 2012, BTE grew its reserve base by 16% to 292M barrel of oils equivalent (BOE). Using a discount rate of 10% per year, BTE management estimates that its year-end reserves are presently valued at 3.76B CAD before taxes. Based on 122M shares outstanding, the per-share net present valuation is $25.9 CAD. BTE currently trades around 1.6 times pre-tax net present valuation. For comparison, the corresponding multiples of PGH, ERF, and PWE are 0.56, 0.76, and 0.75, as seen in the table below. On a reserve valuation basis, BTE is between 2x to 3x more expensive than the three peer companies.
|2P (MM BOE)||512||292||286.33||676|
|net present value (MM NPV; 10% discount)||6088||3760||4652||9130|
|NPV per share||8.79||25.93||18.10||13.45|
|PPS/NPV per share||0.56||1.61||0.76||0.75|
BTE pays $0.22 CAD per share on a monthly basis which translates to $2.64 CAD per share on an annual basis. Based on a closing price per share of $41.74 CAD, the dividend yield is 6.3%. Both PGH and PWE feature yields between 3-4 percentage points higher, with yields of 9.8% and 10.7%, respectively. ERF's annual payout of $0.84 CAD per share results in a yield similar to BTE, with a value of 6.1%.
The dividend coverage ratio here is defined as the ratio of the annual dividend payout divided by the FFO per share. The table below summarizes the dividend coverage information. BTE features the highest dividend coverage ratio of 0.64, which is between 1.5 and 3 times larger than the three peer companies. This metric suggests that BTE is most in danger of cutting its distribution. ERF has the best dividend coverage, with a value of 0.21.
|annual FFO per share||4.18||1.48||4.03||2.46|
|FFO per share/annual dividend||0.63||0.32||0.21||0.44|
BTE is overvalued relative to PGH, ERF, and PWE based on an investigation of funds flow from operations, reserve valuation, dividend yield and dividend coverage ratio. Because of this, it is recommended to sell BTE and establish a position in one or more of the three peer companies mentioned herein.