Baytex Energy's Debt Wall Is Approaching Fast

Dec. 08, 2019 5:42 PM ETBaytex Energy Corp. (BTEGF)44 Comments20 Likes
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Hervé Blandin
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Summary

  • The Canadian oil and gas producer released its 2020 capital program.
  • Free cash flow is key since the company's debt wall is approaching fast.
  • At a WTI price above US$55 per barrel, the investment proposition becomes attractive.

The Canadian oil and gas producer Baytex (BTE) announced its next-year capital program. Based on reasonable assumptions, the company's free cash flow yield can become huge in 2020. But given its significant debt load with important maturities in 2021 and 2022, the producer doesn't have any other option than reducing its net debt over the next few years. Yet, the investment proposition becomes attractive if you forecast WTI prices will stay above US$55 a barrel over the long term.

Oil rigImage source: Skeeze via Pixabay

Note: All the numbers in the article are in Canadian dollars unless otherwise noted.

Next year will look like this year

Given management's 2020 guidance, next year should look like this year. The 2020 capital program in the range of C$500 million to C$575 million corresponds to a production volume range of 93,000 barrels or equivalent a day (boe/d) to 97,000 boe/d. In comparison, management confirmed during the last quarter the company would produce 97,000 boe/d this year with a capital program of C$560 million.

Also, the forecasted cash costs of C$17.41/boe in 2020, excluding royalties, don't change much compared to the costs in the range of C$16.97/boe to C$17.63/boe the company posted over the first three quarters of this year.

Baytex per-barrel costs

Source: Author, based on company reports

Yet management highlighted in a press release free cash flow would be "in excess of C$100 million" in 2020. Given the stable costs and capital program in 2019 and 2020, this forecast seems conservative compared to C$300 million of expected free cash flow this year.

The debt wall

Considering the company's debt profile, the next-year expected free cash flow matters. At the end of this year, net debt should decrease to C$1.9 billion, which is still high since the net debt to adjusted funds flow ratio will stay above 2.

Baytex leverage: net debt to adjusted funds flow

Source: Presentation December 2019

And as you can see in the chart below, the company will face the maturity of its US$400 million (C$530 million) and C$300 million Notes in June 2021 and July 2022, respectively.

Baytex long-term notes maturity schedule

Source: Presentation December 2019

In addition, the company's chart doesn't show the bank loan of C$571 million that expires in 2021 too.

Thus, you can see the importance of free cash flow next year. With C$300 million of free cash flow and with less than half of its C$500 million undrawn credit facility, the company will be able to pay down its 2021 US$400 million Notes with no need to refinance (assuming it renews or extends its credit facility).

But if you assume C$100 million of free cash flow, the situation becomes much riskier. The company will be exposed to the risk of low oil prices when it will have to refinance a part of its debt in the first half of 2021 or before.

Thus, let's estimate Baytex's potential free cash flow in 2020.

Free cash flow in 2020

With its assets in the U.S. (Eagle Ford) and in Canada, Baytex's revenue mostly depends on oil prices in these regions.

Baytex revenue by commodity

Source: Presentation December 2019

Management updated its adjusted funds flow sensitivity table (see below) based on oil price assumptions.

Baytex 2020 adjusted funds flow sensitivity table

Source: Presentation December 2019

Taking into account the midpoint of guidance, the 2020 capital program will amount to C$537.5 million. Based on management's estimated adjusted funds flow of C$700 million at a WTI price of US$55/bbl, free cash flow would reach C$162.5 million.

Also, the assumption of a WTI price at US$55/bbl seems prudent given the spot and futures oil prices above US$58/bbl and US$56/bbl, respectively, listed in the table below.

WTI spot and year-to-date prices

Source: Psac.ca

Besides, the recent meetings of OPEC+ (OPEC plus 10 Non-OPEC nations such as Russia, Mexico, and Kazakhstan) seem to indicate the group is willing to support oil prices with output cuts.

In addition, the WCS-WTI differential, which impacts the company's revenue from its heavy oil production, may diminish. The WCS-WTI differential recently increased because of extra export restrictions related to temporary issues such as the strike at Canadian National Railway (NYSE:CNI) and the Keystone pipeline shut down after a leak.

Differential WCS-WTI prices in 2019

Source: Bmoaddeals.com

Thus, management's statement of free cash flow "in excess of C$100 million" seems conservative. And since the company's costs and capital program in 2019 and 2020 are similar, free cash flow could reach again C$300 million in 2020 with constant oil prices compared to this year.

Attractive investment if WTI prices stay above US$55/bbl

With C$300 million of free cash flow, the company's net debt would drop to C$1.6 billion by the end of 2020, and the net debt to adjusted funds flow ratio would come closer to 2. In addition, with a share price at C$1.5, C$300 million of free cash flow corresponds to an impressive free cash flow yield above 35%.

Thus, Baytex is an attractive investment if you forecast WTI prices will stay above US$55/bbl over the long term.

Baytex's situation isn't without risks, though. The company will still generate positive free cash flow with WTI prices above US$50/bbl. But considering its debt wall, it may have to sell some assets or refinance its debt under unfavorable conditions if WTI prices drop below US$55/bbl over a couple of quarters.

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This article was written by

Hervé Blandin profile picture
3.08K Followers
I leverage my 15-year career as an IT engineer to write mostly about tech stocks with a long-term perspective.Disclaimer: Anything I write isn't investment advice and will for sure contain errors and inaccuracies. Any investment decision you make should be based solely on your own research and judgment.
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Disclosure: I am/we are long BTE. 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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