Baytex Energy (BTE) Valuation - April 10

[dan_s]

I spent four hours today building a forecast/valuation model for BTE and I have posted it to the EPG website.

BTE close today at $5.25Cdn and $3.88US per share.

My initial valuation is based on just 3.5 X annualized operating cash flow per share.
> My valuations are $7.46Cdn and $5.60US per share.
> First Call's current price target is $7.61Cdn
> TipRanks: "In the last 3 months, 7 ranked analysts set 12-month price targets for BTE. The average price target among the analysts is $5.58US."
> After the merger with Ranger Oil was announced: "National Bank of Canada Financial analyst Dan Payne raised the price target on Baytex Energy (BTE:CN) (NYSE: BTE) to Cdn$8.50 (from Cdn$7.75) while maintaining a Sector Perform rating."

At this point I am not ready to add it to our Small-Cap Growth Portfolio. Let's wait until after merger with Ranger Oil closes in June.

[JBtheBrit]

Hi Dan - a quick question on valuation multiple's - looking at the two most recent model updates for Baytex and In Play (I own small positions in In Play and Ranger Oil so interested in both). Trying to understand the logic of 6x for In Play and 3.5x for Baytex. Given the size of In Play I would have thought more of a discount on that name. Is the driver for your lower multiple on Baytex the acquisition risk and higher leverage ?. I know ultimately its for each of us to determine our own multiples and use your excellent models to test these, but interested in your thinking given the wide spread in the two multiples used. Thanks as always. JB

[knusser58]

Hi Dan,
when do you plan to have an updated Profile for Baytex?
Regards,
Klaus

[dan_s]

I have been following Doug Bartole and his team for over ten year. I have a very high level of confidence in the team and my model. InPlay deserves a higher valuation multiple because it is close to being debt free. Plus, it has a lot of "running room" in two very low-risk / high-return areas. I have a lot more confidence in my model for InPlay. It also has significant upside in the East Basin Duvernay Shale Play. IMO InPlay is a "Screaming Takeover Target" at the current share price.

Baytex is new to the Watch List. Once they close the Ranger Oil acquisition and I see two quarters of results that confirm my model assumptions, there is a good chance it will deserve a higher valuation multiple. Baytex has a lot of debt to service with more coming in June. When I add a new company to my Watch List I always like to start with a low valuation multiple. Note that Baytex will have close to a billion shares of stock outstanding when they close the Ranger deal. Some of the Ranger shareholders will likely be selling a lot of shares that they receive in June.

We will publish a profile on Baytex after they release Q1 results. There is a lot of "guessing" on my part in the Q1 forecast.

[JBtheBrit]

Thanks Dan - appreciate the response/color on your thinking.

[dan_s]

I just noticed that the 2023 CapEx estimate on row 43 is wrong.

Baytex's E&D Capex budget is $575 to $650 million (Cdn), which doesn't include the ~$535 million ($13.31/share) that will be paid to Ranger Oil shareholders at closing, which I expect to happen late in Q2.

Per my model, Baytex operating cash flow should be close to $1.6 billion, so they should be able to cover that level of capex and be in great shape heading into 2024. If WTI does go over $100US/bbl (per Raymond James forecast), BTE has a lot of upside for us.

My corrected model will be posted to the EPG website in a few minutes.

[Cliff_N]

When ROCC and Riley passed at $42, I traded my ROCC for REPX. Happy!

[dan_s]

You are both Wise and Lucky.