Baytex - high risk, high reward?

[Petroleum economist]

If you think that WTI can go to $ 90/bbl, then Baytex is a great investment. If you think that WTI can go to $ 70/bbl than stay away.

Summary
Baytex has lowish reserves and a mediocre RRR. The balance sheet is a reasonable condition but needs some strengthening. Profits can soar with higher oil prices but can reduce to nothing with lower oil prices. Shareholder returns are at a good level.

Reserves
• Baytex, after the 2023 acquisition of Ranger Oil , had late 2023 proven reserves of 410 M BoE.
• Proven reserves are equivalent of a low 7.2 years of 2024 production (Industry average 9.5-10 years).
• RRR was a low 0.75 over the last five years (2019-2023), indicating that Baytex has been struggling to replace its production.
• RRR in 2023 (0.97) may indicate that after the Ranger Oil acquisition the reserves replacement will improve.
• Fluids consists mainly of liquids (oil 70.8%, NGL 12.8%, gas 16.4%).
• As the composition of the fluids (71/13/16) is not aligned with the reserves (59/23/18), the oil content over time will reduce.

Production
• Q1 production (150.620 K BoE/d) was down -6.1% versus Q4 2023 (160.373 K BoE/d).
• Baytex provided a 2024 outlook of 155-160 K BoE/d, suggesting that production in Q2-Q4 will be near such levels.
• Baytex has expressed an ambition to grow with 1-4%/year.
• With its limited reserves it is difficult to imagine that this can be realized. It will require a substantial improvement in RRR.
• For 2025 and 2026 I expect a production of 158-162 K BoE/d, whereafter a decline of 2-3%/year will set in, unless additional proven reserves are booked.

Balance sheet
• Late 2022 Baytex had a good solvency (59.4%).
• Due to the $ 2.5 B acquisition of Ranger Oil (part cash/part shares) solvency dropped late 2023 to 51.3% and due to the Q1 net loss to 50.6 % at the end of Q1 2024.
• The debt/EBITDA ratio in 2023 was an acceptable 1.1.
• The balance sheet needs some reinforcement.
• Baytex want to use the 50% of the FCF to strengthen the balance sheet until the current debt (C$ 2.639 B) is reduced to C$ 1.5 B.
• After debt reaches C$ 1.5 B, 25% of the FCF will be directed to the balance sheet and 75% to the shareholders.

Profitability
• Baytex sells its heavy oil (27% of total) at a substantial discount (-$ 24/bbl) to WTI.
• The light oil (44% of total) sells at a smaller discount to WTI (-$ 3.40/bbl).
• The oil discount can reduce with the start-up of the Transmountain pipeline in H2 2024.
• The discount of the realized gas price compared to Henry Hub is limited to -$ 0.43/MM Btu.
• Baytex pays high royalties (21%).
• Baytex incurs average unit costs ($ 37.10/BoE).
• The sum of the oil discounts, royalties and medium unit costs cause Baytex not to be robust under low oil prices. With WTI= $ 65/bbl, Baytex may report net losses.
• Baytex reported in Q1 2024 a net loss of -C$ 16 M. This was mostly due to non-cash hedging losses (-C$ 32 M) and losses on financing derivates (-C$ 38 M).
• With WTI at $ 80-85/bbl I expect a 2024 net profit of C$ 339-490 M (eps C$ 0.41-0.60, PE 7.3-10.3).
• Baytex is a high risk/high reward company. At lower oil prices ($ 65/bbl) it will report a loss but at $ 90/bbl it can have a PE of only 2.8 in 2025.
• For info: Baytex 2024 eps with WTI increasing $ 65-90/bbl at $ 5/bbl intervals: -C$ 0.14, C$ 0.04, C$ 0.23, C$ 0.41, C$ 0.60 and C$ 0.77.

Shareholder returns
• Baytex pays an annual dividend of C$ 0.07.
• Baytex bought back shares in 2023 for a total of C$ 222 M.
• Total yield for shareholders in 2023 was a good of 7%.
• Shareholder returns equate to 50% of the Baytex free cash flow.
• I expect in 2024 till 2026/2027 returns at a similar level.
• Baytex want to use initially 50% of the FCF for shareholder returns and the other 50% to strengthen the balance sheet until the debt < C$ 1.5 B (current debt = C$ 2.639 B). Thereafter 75% of the FCF will be directed to shareholders.
• With free cash flow of C$ 800 M/year (WTI=$ 80/bbl) this means that an increase in shareholder returns is 3.0-3.5 years away.

Conclusions
• Baytex has lowish reserves and has a mediocre RRR.
• The balance sheet is a reasonable condition. Baytex wants to strengthen its balance sheet by reducing debt.
• Profits can soar with higher oil prices but can reduce to nothing with lower oil prices.
• Shareholder returns are at a good level.

There are other companies which will have similar PE’s at $ 90/bbl as Baytex, but have with less downside risk. At WTI = $ 77.99/bbl Baytex ranks low (53rd out of 72). With WTI= $ 90/bbl Baytex jumps to a good 20th position. Baytex is high risk/high reward investment.

If you think that WTI can go to $ 90/bbl, then Baytex is a great investment. If you think that WTI can go to $ 70/bbl than stay away.

[allen46]

Thank you!!

[ChuckGeb]

Imagine what your better picks do at $90 bbl!

[Hawker99]

"• Baytex sells its heavy oil (27% of total) at a substantial discount (-$ 24/bbl) to WTI. "

As the TMX pipeline just delivered it's first cargo to the coast the WSC heavy oil discount has closed up substantially. Now about a $11.10 differential.

Going forward should be a big bump in a quarter of Baytex production revenues.

https://twitter.com/garquake/status/1792183421550072304

[Fraser921]

>Now about a $11.10 differential. That helps Surge SGY and Suncor SU among others