Company Profile

Baytex Energy Corp (TSX: BTE) is a Calgary, Canada-based oil, and gas exploration company. Its operational interest lies in the acquisition, development, and production of crude oil and natural gas in the Western Canadian Sedimentary Basin and in the Eagle Ford in the United States. The company's majority of revenue comes from the Canadian market and rest from the United States.

Investment rationale

• Recovery in oil prices is expected to benefit BTE: Recently, oil and gas industry witnessed tremendous pressure on account of steep volatility in the crude oil prices. The unprecedented plunge in the oil prices since March 2020, on account of a supply glut, emerged out in the market driven by COVID-19 pandemic. However, since April 21, 2020, oil prices are in an uptrend, as easing in lockdown restrictions across the world after approximately two months is likely to bring back oil demand and also a series of production cut announced by OPEC+ cartel is further supporting oil prices in the international markets. Currently, crude prices are hovering near pre-coronavirus range. At the time of writing, (as on June 03, 2020) WTI Crude traded 1.66% higher at US$ 37.41/bbl, a level last witnessed in early March 2020. Crude being the final product offering for the oil exploration companies, a recovery in the oil market is likely to boost stocks of oil exploration companies in the near-term.

• Consistent EBITDA margin above 40% since 2016: BTE has consistently reported an EBITDA margin above 40% since FY16, and year-on-year EBITDA margin has recorded consistent growth. Over the last three years, EBITDA margin has expanded from 40.9% to 59.8%, which implies a compounded average growth rate of 13% between 2016-2019. A higher EBITDA margin reflects the operational efficiency of the company with regards to the revenue and depicts how much operating cash is generated for each dollar of revenue earned.

• Focus on liquidity preservation and cost reduction: To weather the COVID-19 pandemic, the group has reduced its capital budgets by ~50% for the year 2020. Post reduction, the company reported that the capital budget for the year 2020 would be in between US$260 to US$290 million. The decision was towards the efforts to preserve the financial liquidity of the company as it was witnessing unprecedented challenge due to the significant volatility in global crude oil prices. The group is also planning to achieve a cost of savings of ~CAD 135 million in 2020. The group has decent liquidity with undrawn credit capacity of CAD 417 million, net of working capital of CAD 315 million. Investors should also note that the group has zero debt maturity until April 2024.

• BTE shares have registered strong reversal trend on the daily price chart: Given the upside momentum in the oil prices, shares of BTE has also registered a sharp reversal in the past couple of trading sessions. In the last five trading sessions, its shares are featuring a stupendous price return of ~ 37%, primarily driven by a 34.1% spike on June 2, 2020. Also, in the last five trading sessions, its shares have significantly outperformed its benchmark index and peers by ~ 35% and 30% respectively, which indicates a strong upside price momentum in the stock. Further, in a month over a period, its shares have bagged ~ 36% price gain and outperformed the benchmark index by 28% and peers by 15%. So, it seems that the relative strength in the BTE stocks from a short-term standpoint is significantly higher against the peer group, which is a positive indicator.

• Volume Spurt: Over the last five trading sessions, a volume spurt was spotted in the BTE shares. The average daily traded volume for last five days stood at 9,155,958, which was approximately 40% higher than the 30-day average daily traded volume of 6,527,651 and 34% higher against the 90-day average traded volume of 6,833,324, respectively. A volume spike in the last few sessions and surge in the stock price implies that the buying interest in BTE counter is increasing.

Financial Highlights: Q1FY20

• During the period under consideration, the company produced 98,452 boe/d (83% oil and NGL) and generated an adjusted funds flow of CAD 133 million (CAD 0.24 per basic share). However, revenue from the sale of petroleum and natural gasses plummeted by 25% against the corresponding previous financial period, driven by unprecedented challenge due to the effects of COVID-19 and the significant decline in global crude oil prices. The group recorded a total impairment of CAD 2,716 million as the carrying value of its oil and gas properties exceeded their recoverable amounts. This impairment resulted in a net loss of $2,498 million in the first quarter.

• Performance of Eagle Ford and Viking Light remained decent during the quarter. At Eagle Ford, the group participated in the drilling of 17 wells (3.8 net) and commenced production from 30 wells (6.1 net). The wells brought on-stream during the quarter generated an average 30-day initial production of approximately 1,875 boe/d per well. The company expect to bring approximately 16 to 18 net wells on production in the Eagle Ford in 2020, down from the original guidance of 22 net wells. The group recorded an average production of 24,696 boe/d (92% oil and NGL) at Viking Light during Q1/2020, as compared to 22,050 boe/d in Q4/2019. The group invested CAD 79 million on exploration and development in the Viking Light and commenced production from 83 (78.5 net) wells.

• The company issued senior unsecured notes amounting to US$ 500 million with a coupon rate of 8.75%. These notes will be maturing in April 2027. The group redeemed two series of senior unsecured notes - US$ 400 million due in 2021 and CAD 300 million due in 2022.

Source: Company Reports

Guidance For 2020

For 2020, the company has reduced its production target to 85,000-89,000 boe/d, against 93,000-97000 boe/d announced earlier, as the company proactively shutting-in approximately 3,500 boe/d of low or negative margin heavy oil production in order to optimize the value of resource base and maximize adjusted funds flow.

Source: Company Filings. 

Key Risks

Volatility in Crude Oil Prices: The company’s business is highly exposed to the volatility in the crude oil prices, any downside in the oil prices could take a hit on the company’s financial performances.

FX Risk: BTE is also exposed to forex risks, as any fall in the Canadian dollar against the basket of majors could have a weigh on the group’s topline and earnings.

COVID-19 uncertainties: Further, the company’s operations and demand offtake can hit hard if there is another outbreak took place. However, the outbreak of COVID-19 is flattering, but as there is no vaccine has developed yet, the potential next outbreak could hit the business.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 18.84% of the total shareholding. RBC Global Asset Management Inc. and The Vanguard Group, Inc. holds the maximum interests in the company at 2.85% and 2.85%, respectively.

Stock Performance

1-year price chart (as on June 02^nd, 2020, after the market close). Source: Thomson Reuters.

At the last closing price of CAD 0.59 on June 02, 2020, its shares traded approximately 34% higher against the previous closing price. In a year over the period, its shares have registered a 52w High of CAD 2.36 as on September 23^rd, 2019 and a 52w Low of CAD 0.27 as on March 30^th, 2020. At the last traded price, the stocks traded approximately 75% below its 52w high price level and 120% above its low-price level respectively.

Over a month period, BTE shares have climbed approximately 36% and extended the rally in the past five trading sessions as well, as it is up 37% in the last five trading sessions. However, on a YoY basis and YTD basis, the stocks are featuring a negative return of 72% and 69%, respectively.

Further, despite a recent upsurge in the stock, it was still quoting substantially below its crucial long-term support level of 200-day SMA. However, the stock was trading above its crucial short-term support levels of 5-day, 10-day, 20-day, 30-day, and 50-day SMAs, indicating a positive trend. Moving Average Convergence Divergence is rising, with the difference between 12-day and the 26-day exponential moving average is positive, which is a positive price trend in the stock.

Stock Recommendation

The company has taken a measure to reduce its costs and targeting to achieve $135 million in cost savings. The group have shut-in approximately 25,000 boe/d of production which can be resumed according to demand. The shut-in is likely to have a positive impact on the adjusted fund flow. The group has reduced its planned capital expenditure which is likely to boost the liquidity. Going forward, we expect the demand for crude oil to recover as governments across the globe are easing the lockdown restrictions and allowing industrial activities to resume. These measures, along with production cuts announced by the OPEC+ cartel, are likely to support the oil prices in the near term. Meanwhile, following recent upside momentum in the oil prices, shares of BTE has registered a sharp reversal in the past few trading sessions, and the trend is expected to continue in the near term. On the valuation front, the stock is available at a forward EV/EBITDA multiple of 6.5x against the oil and gas industry average of 8.4x, which suggests that the stock is trading at a discount. Hence, given the investment rationales and risk associated with the company, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 0.62 on June 3, 2020.  

Disclaimer

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