At the time of this post BTE was trading at $4.79Cdn and $3.50US.
I updated my forecast/valuation model for their Q1 results and updated guidance (no significant changes).
I'm lowering my valuation by $0.50US to $6.40US ($8.64Cdn). < I'm still bullish on this stock. Q1 operating expenses were higher than their guidance, but I think it was just weather related.
My valuation is just 3.75 X operating cash flow per share, which is a low multiple.
> Baytex expects to generate over $700Cdn million of free cash flow this year.
> Well results in South Texas and in Canada are good and they have lots of running room.
> Balance sheet still needs some work before they can raise dividends.
> Higher realized oil prices, thanks to the TMX pipeline, should give operating cash flow a nice boost this summer. I also expect NGL and natural gas prices to drift higher.
> Baytex increased production by 46.3% in 2023, primarily due to the Ranger Oil Acquisition that closed on 6/20/2023. Their production is expected to increase another 25% or more in 2024 with most of their growth coming from the South Texas assets they acquired from Ranger.
> Production should be up near 160,000 Boepd (~115,000 bopd) by year-end.
> I really like the production mix of 72% oil, 12% NGLs and just 16% natural gas.
Scotiabank and BMO Capital have submitted updated reports to TipRanks. They both have price targets of $6.00Cdn.
Baytex Energy (BTE) Valuation Update - May 10
Baytex Energy (BTE) Valuation Update - May 10
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Baytex Energy (BTE) Valuation Update - May 10
Well you get to see the potential upside for BTE by HFI Research. The potential downside is behind a pay wall. One would think the tease should be reversed.
https://www.hfir-ideas.com/p/idea-baytex-energy-more-negatives
https://www.hfir-ideas.com/p/idea-baytex-energy-more-negatives
Re: Baytex Energy (BTE) Valuation Update - May 10
I like BTE for two reasons:
1. I believe the "Right Price" for WTI is over $80/bbl, which supports HFI's Bull Case below.
2. I also believe that they acquired Ranger Oil (a company I followed for over five years) are a very good price. Baytex has a lot of upside in the South Texas Eagle Ford / Austin Chalk play.
HFI Research:
BTE is the ultimate battleground E&P stock because both the bulls and bears have valid arguments for the stock’s purported huge upside and downside cases. For the time being, however, we count ourselves in the bear camp until the company demonstrates it can address the factors that cloud its longer-term outlook and management executes on its capital return plan for several quarters.
BTE Bulls Have a Case
BTE shares are generally held for their upside amid higher oil prices. As oil prices climb, the company’s free cash flow surges higher at a rate that few of its peers can match.
At $80 per barrel WTI and $2.25 per MMBtu AECO, we estimate the company generates C$790 million of free cash flow, equivalent to C$0.96 per share and a 20.1% free cash flow yield on the current stock price of C$4.64. If the shares were to trade at a 12% free cash flow yield, they would trade at C$8.00, implying upside of 73%. This represents the tremendous upside potential in the shares using commodity assumptions that are hardly heroic.
Management intends to allocate the company’s free cash flow 50%/50% between debt repayment and a mix of dividends and share repurchases. Once net debt is reduced from C$2.6 billion to C$1.5 billion, the company intends to boost its payout to 75% of free cash flow.
And if the shares were to trade at a 12% free cash flow yield, their return profile at different commodity prices look like this:
While these are eye-popping returns, they improve materially if we factor in share repurchases. For example, assuming a flat $80 per barrel WTI and C$4.62 stock price, share repurchases from free cash flow after dividends over the next three quarters alone would eliminate 58.2 million shares. BTE’s share count would fall from 821.7 million at the end of the first quarter to 763.5 million at year-end. At that point, the share repurchases would have caused 2024 free cash flow per share to increase from C$0.96 to C$1.04 while the free cash flow yield on the current share price would rise from 20.86% to 22.4%—quite an improvement in only three quarters at $80 per barrel WTI.
At our assumed 2024 commodity prices of $87.50 per barrel WTI, $2.25 per MMBtu AECO, and a $13.50 per barrel WTI-WCS differential, free cash flow comes to C$1.09 billion, resulting in C$9.87 of value from a discounted cash flow perspective using a conservative 12% discount rate and cutting the terminal value in half. The implied return from the current stock price of C$4.62 is 114%. < My valuation of BTE is based on 2024 oil and gas prices of $82.35/bbl & $2.15/mcf. For 2025 my forecasts are based on $85.00/bbl of oil and $3.50/mcf. In all of my forecast models I adjust for regional price differences and the impact of hedges.
BTE has other things going for it. Its first-quarter production results met analyst consensus expectations. Drilling results have been good, and the company recently expanded in the Duvernay. Management is touting Eagle Ford “refracs” on pre-2017 wells as achieving 100% IRRs, which could boost cash flow torque further. < This is just one of the reasons that I think the acquisition of Ranger Oil was a great deal for Baytex. It will take time to realize the full potential. Rising natural gas prices will make it even better.
Net debt stood at C$2.64 billion at the end of the first quarter, though it was inflated by a weak Canadian dollar. Debt is approximately 1.3-times funds from operations at $80 per barrel WTI, on the high side for an E&P these days but not concerning in light of our positive outlook for oil prices over the coming years. The company also recently executed a private offering of C$575 million of 7.375% senior unsecured notes to redeem its 8.75% notes due 2027 and push the maturity out to 2028.
These positives are why BTE shares are among the go-to names for investors who expect higher oil prices. Based on cash flow growth alone, they offer the prospect of more than a double with WTI sustained at $80 per barrel and AECO at $3.00 per MMBtu.
1. I believe the "Right Price" for WTI is over $80/bbl, which supports HFI's Bull Case below.
2. I also believe that they acquired Ranger Oil (a company I followed for over five years) are a very good price. Baytex has a lot of upside in the South Texas Eagle Ford / Austin Chalk play.
HFI Research:
BTE is the ultimate battleground E&P stock because both the bulls and bears have valid arguments for the stock’s purported huge upside and downside cases. For the time being, however, we count ourselves in the bear camp until the company demonstrates it can address the factors that cloud its longer-term outlook and management executes on its capital return plan for several quarters.
BTE Bulls Have a Case
BTE shares are generally held for their upside amid higher oil prices. As oil prices climb, the company’s free cash flow surges higher at a rate that few of its peers can match.
At $80 per barrel WTI and $2.25 per MMBtu AECO, we estimate the company generates C$790 million of free cash flow, equivalent to C$0.96 per share and a 20.1% free cash flow yield on the current stock price of C$4.64. If the shares were to trade at a 12% free cash flow yield, they would trade at C$8.00, implying upside of 73%. This represents the tremendous upside potential in the shares using commodity assumptions that are hardly heroic.
Management intends to allocate the company’s free cash flow 50%/50% between debt repayment and a mix of dividends and share repurchases. Once net debt is reduced from C$2.6 billion to C$1.5 billion, the company intends to boost its payout to 75% of free cash flow.
And if the shares were to trade at a 12% free cash flow yield, their return profile at different commodity prices look like this:
While these are eye-popping returns, they improve materially if we factor in share repurchases. For example, assuming a flat $80 per barrel WTI and C$4.62 stock price, share repurchases from free cash flow after dividends over the next three quarters alone would eliminate 58.2 million shares. BTE’s share count would fall from 821.7 million at the end of the first quarter to 763.5 million at year-end. At that point, the share repurchases would have caused 2024 free cash flow per share to increase from C$0.96 to C$1.04 while the free cash flow yield on the current share price would rise from 20.86% to 22.4%—quite an improvement in only three quarters at $80 per barrel WTI.
At our assumed 2024 commodity prices of $87.50 per barrel WTI, $2.25 per MMBtu AECO, and a $13.50 per barrel WTI-WCS differential, free cash flow comes to C$1.09 billion, resulting in C$9.87 of value from a discounted cash flow perspective using a conservative 12% discount rate and cutting the terminal value in half. The implied return from the current stock price of C$4.62 is 114%. < My valuation of BTE is based on 2024 oil and gas prices of $82.35/bbl & $2.15/mcf. For 2025 my forecasts are based on $85.00/bbl of oil and $3.50/mcf. In all of my forecast models I adjust for regional price differences and the impact of hedges.
BTE has other things going for it. Its first-quarter production results met analyst consensus expectations. Drilling results have been good, and the company recently expanded in the Duvernay. Management is touting Eagle Ford “refracs” on pre-2017 wells as achieving 100% IRRs, which could boost cash flow torque further. < This is just one of the reasons that I think the acquisition of Ranger Oil was a great deal for Baytex. It will take time to realize the full potential. Rising natural gas prices will make it even better.
Net debt stood at C$2.64 billion at the end of the first quarter, though it was inflated by a weak Canadian dollar. Debt is approximately 1.3-times funds from operations at $80 per barrel WTI, on the high side for an E&P these days but not concerning in light of our positive outlook for oil prices over the coming years. The company also recently executed a private offering of C$575 million of 7.375% senior unsecured notes to redeem its 8.75% notes due 2027 and push the maturity out to 2028.
These positives are why BTE shares are among the go-to names for investors who expect higher oil prices. Based on cash flow growth alone, they offer the prospect of more than a double with WTI sustained at $80 per barrel and AECO at $3.00 per MMBtu.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group