Baytex Energy: A Look At Its 2017 Guidance

| About: Baytex Energy (BTE)

Summary

Baytex Energy expects exit rate growth of 3% to 4% for 2017 and should be able to achieve this by spending within cash flow at $55 oil.

$60 oil could allow for 10+% exit rate growth, while $50 oil could result in a 3% to 4% exit rate decline or a modest increase in debt.

I think there may be some upside versus Baytex's operating expense guidance as that appears to be on the conservative side.

Baytex appears appropriately priced for $55 long-term oil, while $60 oil could raise its value to $7 to $8. $50 oil could lower its value to $3.

Baytex Energy (NYSE:BTE) has provided guidance for 2017 that indicates that Baytex can generate a bit of positive cash flow and/or grow production at mid-$50s oil. With 2017 WTI oil prices now improving to around $55, Baytex can grow production modestly while spending within cash flow. Baytex is primarily focusing its capital expenditures on its Eagle Ford assets, although due to the restoration of shut-in Canadian production and its recent Canadian acquisition, its 2017 production profile is expected to be 50% from Canada and 50% from the US rather than the US majority split that I previously expected.

Please note that this article discusses Baytex's numbers in US dollars, while Baytex primarily uses Canadian dollars in its reports and presentations.

2017 Guidance

At $55 oil, Baytex should be able to deliver slightly positive cash flow in 2017 while also growing its exit rate production by 3% to 4%. At its guidance midpoint of 68,000 BOEPD with a split of 35% heavy oil, 31% light oil and condensate, 22% natural gas and 12% NGLs, Baytex should be able to deliver around $782 million in revenue.

Units

$ Per Unit

$ Million

Heavy Oil

8,687,000

$32.00

$278

Light Oil and Condensate

7,694,200

$49.65

$382

NGLs

2,978,400

$12.40

$37

Natural Gas

32,762,400

$2.60

$85

Total

$782

Offsetting this is approximately $778 million in cash expenditures including $250 million in capital expenditures (compared to maintenance capital expenditure levels of approximately $230 million). Royalties are approximately $182 million (23% of revenue) with the US operations having an estimated royalty rate of around 29% and the Canadian operations having an estimated royalty rate of around 16% at the indicated oil prices.

$ Million

Royalties

$182

Operating Expenses

$220

Transportation

$23

Cash General And Admin

$25

Cash Interest

$78

Capital Expenditures

$250

Total Expenses

$778

As a result, Baytex is expected to deliver marginally positive ($4 million) cash flow at $55 oil while growing exit rate production by 3% to 4%.

Notes About Operating Costs

Some of Baytex's guidance around costs appears to be a bit conservative. Baytex's guidance is for operating expenses of approximately $8.85 per BOE. This compares to Baytex's $6.95 per BOE in operating expenses for Q3 2016 and a 2016 YTD average of $7.75 per BOE. While costs may increase slightly in conjunction with higher oil prices, it would not be surprising for Baytex's operating expenses to come in at $8 per BOE or less for 2017.

If operating expenses average $7.85 per BOE, it would result in Baytex's cash flow being improved by around $25 million compared to its guidance.

Oil Prices And Effect On Production And Share Value

I've previously mentioned that I believe that Baytex is worth approximately $5 at a long-term oil price of $55. At $60 oil, Baytex should be able to deliver roughly 10% exit rate production growth while spending within its cash flow. This would put its 2017 exit rate at roughly 74,000 BOEPD. Baytex's value would increase to around $7 to $8 per share if the expectation for long-term oil prices rose to $60. If there was a temporary increase in oil prices that allowed Baytex to increase production to around 74,000 BOEPD while spending within cash flow, but long-term oil prices remained around $55, then Baytex's estimated value would be around $5.50 to $6.00 instead.

On the other hand, at $50 oil Baytex would likely face exit rate declines of around 3% to 4% if it wanted to match capital expenditures to cash flow. It could also tap its credit facility to cover the projected shortfall of approximately $40 million in order to maintain production levels, which might be the best course of action since Baytex needs to maintain (or nearly maintain) production levels to deal with its eventual debt maturities. A short-term decline in oil prices to $50 resulting in flat or slight declines in production would have a modest impact on Baytex's value (as 65,000 BOEPD in production and $55 long-term oil prices translates into an estimated value of around $4.50). However, if long-term oil prices fell to $50, then Baytex's value would decline to around $3. So far long-term oil prices (such as 2020 futures) have stayed above $50 since April 2016 though.

Conclusion

Baytex appears set to deliver modest production growth during 2017 while spending within cash flow at $55 oil. Current strip prices should allow Baytex to grow production at a low-to-mid single digits rate, which will help it slowly deleverage. Baytex does have the advantage of having no major debt maturities (other than its credit facility) until 2021, so the current pricing situation should be adequate for them to get into a position to refinance in a few years. Things could still go either way though as $60 oil would allow strong production growth of 10+%, while $50 oil would result in modest production declines or debt increases.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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