As the scramble for investment income continues, reaching for yield can tempt the investor with under appreciated risk. Quality oil producing income securities are especially rare. Knowing the commodity price risk is real, an investor with a macro view of robust oil prices would do well to consider Baytex Energy (NYSE:BTE) as an income producing company.
Canadian Baytex is listed on the NYSE and is superior to its peers. Pengrowth (NYSE:PGH) and Enerplus (NYSE:ERF) made new 52-week lows yesterday and Penn West (NYSE:PWE) was close. Baytex is dominated by crude oil production and has assets with the highest of capital efficiency. Baytex has a sustainable growth and income strategy, as opposed to many companies that borrow to grow and pay a dividend.
Baytex is targeting organic growth of 9% annual production growth. Management strives to keep capital spending and the dividend within the cash flow of the company. Baytex typically has the dividend at 30%-40% of cash flow, and currently is at 39%. The dividend yield is 5.50% and is paid monthly at a current rate of 22 cents a share.
Crude oil is 85% of production and 92% of the reserve base. Light oil production from horizontal drilling in the Bakken and Viking is a small portion of production. Soon Baytex will close on the sale of most of their non-operated Bakken land for $311 million to Magnum Hunter (MHR), further strengthening its conservative balance sheet by bringing the debt-to-cash-flow ratio down to 0.6. This deal is reducing its production guidance by only 1% for 2012. Note full-year capex is $400 million.
Heavy oil production is the large portion of Baytex's production and provides outstanding economics. Heavy oil production drives Baytex's industry leading recycle ratios of 3.1 times against industry norms below 2.0. Seal is the key growth asset as a non-mining oil sand play. Potential investors ought to know heavy oil trades at a discount to light oil with seasonality based on the U.S. summer asphalt paving season. Yet the heavy oil economics remain remarkable.
Last week the shares were down on news the CEO was leaving the company. The Board of Directors and CEO disagreed on the strategic direction for Baytex. The board would like continue in the same conservative direction; unsaid but understood was the CEO's desire to take the company down a more aggressive path. Baytex remains in outstanding position.
Baytex has about one-third of 2012 production hedged at strong prices and has hedged heavy oil differentials at good prices. For 2013 and beyond Baytex is currently not hedged and exposed to the oil price. Baytex is a rare high-quality growth income investment leveraged to oil.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.