2023-12-17 07:56:10 ET
Summary
- Baytex Energy recently provided 2024 and later-year guidance, looking for moderate production growth going forward.
- The company's FCF guidance was disappointing, given lower oil price assumptions.
- BTE's stock remains cheap, but is a more speculative play given its debt load and sensitivities to oil prices.
Back in September , I placed a “Strong Buy” rating on Baytex ( BTE ), saying with its recent acquisition in the Eagle Ford that it looked well positioned to quickly pay down debt and deleverage at current oil prices. In early November , meanwhile, I upped my price target on the stock after solid Q3 results. With the company recently providing 2024 guidance, let’s catch up on the name.
Company Profile
As a quick refresher, BTE is a Canadian based E&P focused on light and heavy oil production in the Eagle Ford in the U.S. and several basins in Canada, including light oil basins Viking and Duvernay, as well as heavy oil basins Peace River, Peavine, and Lloydminster. The Eagle Ford is the company’s biggest basin, representing about 60% of its production.
Asset Sale and 2024 Outlook
There has been a number of developments with BTE since I last looked at the stock. The first that in mid-November the Appeals Division of the Canada Revenue Agency ("CRA") denied the company non-capital loss deductions related to its income taxes for the years 2011-2014. This relates to commercial trust acquisitions that the company made in 2010 that it used to reduce its taxable income in future years. The CRA asserts that BTE owes the company C$244.8 million in taxes, C$166.6 million in late payment interest, and C$4.1 million in late penalties.
While BTE is appealing to the Tax Court of Canada, it purchased a C$272.5 million insurance policy for C$60 million to mitigate the risk. This moves caps much of the risk, although it doesn't cover the entire liability and interest penalties are likely to continue to increase.
Later in November, meanwhile, the E&P announced the sale of some of its Viking assets in southwest Saskatchewan. The deal is effective back to October 1 st and is expected to close by year-end.
BTE will receive C$153.8 million in the transaction. The assets currently have production of 4,000 boe/d, of which 100% is light and medium crude. BTE will use the proceeds to pay down debt.
Earlier this month , BTE issued 2024 guidance and provided a 5-year outlook.
For 2024, the company has set aside a capex budget of C$1.2-1.3 billion for exploration and development. This is projected to result in annual average production of between 150,000-156,000 boe/d. As reference, the company’s production was 150,600 boe/d in Q3, and it solid off 4,000 boe/d production with the Viking sale. The company said at the mid-point this represents a 1-2% increase from forecast second-half 2023 production, after adjusting for the asset sale.
The company projects that about 60% of its production will come from the Eagle Ford, with the rest coming from its Canadian assets. It will direct between 60-65% of its development capex towards the Eagle Ford and 45-40% towards its Canadian assets. About 55% of its capex budget will come in the first half of the year.
BTE is planning to bring 62 net Eagle Ford wells online next year, including 46 net operated wells. For its Canadian light oil business, it plans to bring 93 net wells onstream in Viking and 7 in the Pembina Duvernay play. With regards to Canadian heavy oil, it is looking to bring online 40 net Lloydminster Mannville wells, 35 net Peavine Clearwater wells, 9 net wells at Peace River, wells and 4.5 net wells at Morinville. It also has 14 stratigraphic test wells planned.
On the cost front, it is looking to generate capital efficiencies of approximately $22,000 per boe/d in 2024. In the Eagle Ford, meanwhile, it is pursuing an 8% improvement it operated drilling and completion costs per completed lateral foot versus 2023 levels.
Based on current strip prices at the time, BTE is projecting to generate C$530 million in free cash flow in 2024. Based on its commentary, it appears to be looking for adjusted EBITDA of around C$2.1 billion. Its price assumptions for 2024 are WTI prices of $73; a WCS differential of $16; NYMEX Gas at $2.90 per MMbtu; and an exchange rate (CAD/USD) of 1.35.
On the hedging front, the company has hedges for 40% of its crude production in the first half using two-way collars with a floor price of $60 and a ceiling price of $100. For the second half, it has 25% of its oil production hedged with a floor price of $60 and a ceiling price of $98.
The company plans to use half its FCF to buy back shares and pay its dividend and the other half to pay down debt.
Looking towards its 5-year outlook, the company is projecting to increase production by 1-4% a year to reach 170,000 boe/d in 2028. It expects to spend between C$1.2-1.4 billion a year in development capex during this period.
During that time, the company is projecting cumulative free cash flow of $2.9 billion, and for FCF per share to rise by 90% from 2024 to 2028. It expects to reduce its debt by C$1 billion during that time and to lower its leverage to 0.5x. It also expects to return $1.7 billion to shareholders during that time in the form of buybacks and dividends.
The company’s outlook is based on $70 WTI. At $80 it would generate C$4.6 billion in free cash flow and at $90 WTI it would be C$6.0 billion
After projecting C$558 million in free cash flow for the 2 nd half of 2023, the C$530 million projection for full year 2024 is disappointing, as its 2 nd half 2023 run-rate was equal to C$1.12 billion, or about US$825 million. Most of that, however, is due to a reduction of its oil price assumption, which drops from $83 WTI in the 2 nd half to $73 WTI in 2024. Based on the sensitivities that BTE provides, that’s about a C$430 difference, while the Viking disposition is probably around another C$50 million.
Given where current WTI prices are, BTE likely will fall short of its Q4 free cash flow guidance, with oil falling below $70 in December. Looking ahead, the company is obviously very levered to oil prices, which if oil rallies, BTE should be a big beneficiary to the tune of C$215 million for every $5 yearly move in the price of WTI. The higher oil prices are, the more debt it can pay off and the more money it will have towards share buybacks.
As for production, slow and steady growth is the right move, with more of a focus on FCF generation. Reducing debt and buying back its undervalued stock is a good capital allocation strategy in my view.
Valuation
BTE trades at 2.65x EBITDA based on 2024 analyst estimates of $1.71 billion. Based on the 2025 consensus of $1.68 billion, the stock trades at a 2.7x multiple. Of course, the price of oil and natural gas can change the actual results immensely.
BTE is valued in the low-end of the pack compared to other independent E&Ps
BTE Valuation Vs Peers (FinBox)
Let’s assume based on its 2024 guidance and a lower Q4 based on oil prices, that BTE can reduce debt by C$150 million in Q4 and C$250 million in 2024 (US$300 million total). At the same time, let’s assume it can reduce its share count by 100 million over the same period. Then let’s place a 3.5-4.5x EV/EBITDA on the 2025 consensus from there (which is closer to its U.S. peers), and you can get stock valued between $5.75-8.00. (note this is in USD).
Conclusion
Given its debt and sensitivities to oil prices, BTE is in many ways a charged way to play the price of oil. The stock is relatively inexpensive, and with its free cash flow generation, it should be able to nicely de-lever in the coming years, as long as oil prices hold up.
However, the risk is that if oil prices crash, BTE’s higher debt load make it vulnerable to bankruptcy risk and more likely to sell-off harder. While I have been bullish on oil, prices have weakened over concerns about the macro economy. At the same time, there is a theory that if the Saudis cannot boost oil prices, they could reverse course and flood the market with oil to drive down prices and reduce North American production growth. That would be a bad scenario for oil companies in general and BTE in particular given its debt load.
At this time, I’m going to reduce my target from $8.50 to $6.50 (both USD) given lower oil prices and a bit of heightened risk. I will also reduce by rating from “Strong Buy” to “Buy.” BTE still has a lot of potential upside, but if oil prices get materially worse from here, it also has a lot of downside. As such, I’d view it as a bit more speculative at this time.
For further details see:
Baytex: Downgrading To 'Buy' On Lower Oil Price Assumptions