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Baytex Energy: High Leverage Can Be A Good Thing

Mar. 09, 2021 9:42 AM ETBaytex Energy Corp. (BTE), BTE:CASPGYF, WCP:CA46 Comments
Seeking Value profile picture
Seeking Value
138 Followers

Summary

  • Baytex is highly leveraged to rising oil prices.
  • Free cash flow at $65 WTI is tremendous.
  • Consensus is playing catchup to increasing oil and stock prices.

Introduction

Baytex (BTEGF) is an oil focused E&P with diversified assets both from a geographical and product standpoint. They have production in Texas, Alberta and Saskatchewan, which is composed of heavy oil, light oil, natural gas and NGLs. Baytex expects to produce between 73-77,000 BOE per day in 2021. Oil prices have materially increased since November, completely changing the fortunes of this indebted company. The difference between $45 WTI to $65 WTI is not a steady consistent increase to cash flows, but rather a hockey stick-like inflection that's a true game changer not only for survivability but for profitability as well.

(Source: Investor presentation)

Leverage

Baytex is a highly leveraged oil company with $1.85 billion in net debt and a current market cap of $840 million. For comparison purposes, Whitecap Resources (OTCPK:SPGYF) has $1.08 billion in net debt and a market cap of $3.15 billion. The upside-down nature of Baytex’s capital structure, net debt being greater than equity value, is a double-edged sword. In bad times, it’s a killer, but in boom times, it acts like a rocket ship for the equity value. With WTI rallying substantially over the past several months, the concern from investors is, is this sustainable? We believe that WTI prices over $60 per barrel are here to stay. The bull thesis for oil is as follows:

  • Limited capital spending from E&Ps since the 2016 price collapse, exacerbated by the 2020 pandemic
  • Lack of major conventional projects coming online to arrest natural declines in conventional production
  • Scarred management teams that so far are demonstrating capital discipline
  • Shale Tier 1 inventory being depleted
  • Green initiatives + prior poor performance restricting capital from funding future oil projects, increasing the hurdle rate
  • A disciplined + aligned OPEC

Given the circumstances, a sustained oil price recovery appears to be real, with $70

This article was written by

Seeking Value profile picture
138 Followers
Investing is a hobby, I'd consider myself a value investor, typically I'm buying unloved out of favour stocks, but thats not written in stone.

Analyst’s Disclosure: I am/we are long BTEGF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (46)

J
John.9
02 Apr. 2021
The next earnings report [early May] will help validate these assumptions. Like most companies in Covid, they have cut way back on costs and said they will engage in new explorations slowly. Currently in cash-cow mode.
OTT Equity Analysis profile picture
@John.9 The bull case for me is that we are entering a new period of OPEC-controlled price stability. Greed from someone or everyone will probably screw it up .. but we'll see. Everyone hopes they can be the only one that increases.

If demand comes back or exceeds all time highs it may not matter, but I am not counting on demand ....
d
Seeking Value - I’m late in reading your article so maybe you don’t see my question and can’t reply - so that’s my loss.

Anyway, I really picked up on your illustration using current EV plus 50% for change from WTI $45 to $65. Seems well justified by netback change at these rates.
Can you suggest EV changes for other Cdn’s I’m interested in - ERF, OBE & VET. Thanks.
K
Basically, at current oil prices, Baytex can pay back its net debt in about four years just from FCF.

In that case, the share price can go up to 7-8 CAD per share in 2-3 years. Which is more than 500% compared to current level.
K
Ktar
12 Mar. 2021
Does this company plan to get back to NYSE? Investors are generally not so interested in OTC.
Michael Blair profile picture
@Ktar I like it when investors are "not so interested". Leaves the door open for me to load up.
River18 profile picture
@Ktar
I doubt they will ever go back to listing on the NYSE.
It costs a lot more money to be NYSE listed, and you have more accounting that has to be provided to meet regulations.
Having to pay $4.95 per trade is not as good as buying for free, but Baytex is saving a lot of money every year by just listing on the OTC.
The volume is still much better than some other Canadian energy names listed on the OTC that are too dumb to even update the name of the company to match with their silly OTC listing that they inherited from a previous company that used to have the 5 letter ticker before.
Whitecap and Surge are two examples of clueless management, that would rather find investors in a country that is 1/10th the size of the USA.
K
Ktar
13 Mar. 2021
@Michael Blair Yeah that is probably why it is still lingering at $1.20. Good thing is that it is listed at TSE and price seems matching OTC. My hope is sometime down the road BTE will become part of a bigger player.
t
Despite the run up, BTE is still priced as if oil is trading at $45-50, not $65. Even if oil just stays flat this is a multi bagger still. If oil gets tight and strengthens further, the stock either goes up a lot or BTE will have enough extra FCF to buy a ton of stock, which likely would be the best use of money
River18 profile picture
@twfry
Maybe that is because of the lousy hedges that BTE got at the end of 2020??? Maybe when they are gone, then BTE will regain its torque.
Michael Blair profile picture
@twfry The best use of extra FCF is to reduce debt to a level no more than 1 x CF. Buybacks just add risk at this point.
OTT Equity Analysis profile picture
@Michael Blair It is frustrating that the best time to do a buyback is usually when the stock is trading at all-time highs.

I do agree that they can't really afford a buyback.
K
"In TD’s research update following Baytex’s Q4/20 results, they provided a price target of $1.30/share. On the surface that would appear to be a bearish piece of evidence as the current share price is sitting at $1.50, implying 13% downside".

So what is your price target?
Michael Blair profile picture
@Kelly K If commodity prices remain north of $60 WTI, I expect to see BTE trade north of $10 within 3 years.
River18 profile picture
@Kelly K
TD's price target of C$1.30 a share is using WTI -48 price deck.
WTI is much higher now, so they will have to rerate those price targets once they smell the coffee.
L
I'm very impressed with your article. I know the oil sector, especially the Canadian oil sector, and Baytex Energy inside out. You certainly have done your homework. This may be the best article I have ever read on Seeking Alpha.
Seeking Value profile picture
@Lexari Wow, thanks for the kind words.
d
@Seeking Value please please look into Valaris, Saipem, Borr and Diamond offshore .. I think there are incredible opportunities in these companies .. thanks
Justy72727 profile picture
Good article, I enjoyed the read. I’m glad you mentioned Baytex’s downside which is their hedges being so low for full perspective.

I really like this company, and they have no debt due for several years. It’s my 3rd largest position in my portfolio.
Michael Blair profile picture
BTE will be a big winner if oil prices stay at these levels or higher. Patience will pay off. This article has it right.
K
BTE should sell its Eagle Ford asset and pay down debt...then focus on developping the Duvernay with their FCF. If Duvernay is a prolific as they think it will be then BTE will be 5-10x its current value
OTT Equity Analysis profile picture
@Kipling Investments I like this idea a lot. The 8% notes are a huge drag.
j
@Kipling Investments your comment doesn’t make sense at all. They survived the downturn. Now is when you want leverage so they can reap the benefits.... come on. Think before you put something like that out to the world...
OTT Equity Analysis profile picture
@juliankean They could get a much better price for those assets than a year ago, take out the mafia-interest debt and then invest capex into heavy oil.
River18 profile picture
Long BTEGF.
A great article.
Seeking Value profile picture
@River18 Thanks
Keep in mind that BTE receives Louisiana Light pricing for its Texas oil, which is always higher than WTI. Currently LL is trading about equal to Brent.
Chancer profile picture
Another factor is banks less interested in lending to fossil fuel producers (oil and NG) due to both (1) risk and political/government pressure to NOT lend - including the ESG agenda.

I hope that oil and NG prices skyrocket as good for offshore oil, NG pipelines, and higher paying oil industry jobs. $80-$100 oil is great, but $150 oil is OK with me. I do not mind higher gas prices, as my 7 year old car only has 26K miles- last year I only drove 997 miles
b
I've noticed that much of the research available on @tdameritrade is stale at best. I've been a client of theirs since the Waterhouse days and it has been a real impediment to me. I get better, higher quality data via SA and Twitter. I'm not sure that any of the other brokers are any better. I am looking at my own models but hate to reinvent the wheel. Anyone have any better ideas?
OTT Equity Analysis profile picture
@billknowsall You're doing it right. The research on the brokers is and has always been rubbish. I have been with Wells Fargo, E-trade, and Fidelity, all garbage that I think is only useful to help novices make bad decisions.
b
Thx for the article and reinforcing the thesis on BTE. This one will appreciate measurably before summer and carry on...
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