Baytex Energy Corp. (TSX: BTE) is a Canada-based energy company, that is actively engaged in the acquisition, development, and production of crude oil and natural gas in the Western Canadian Sedimentary Basin and the Eagle Ford in the US. The company operates primarily in Canada and the USA.   

Key Highlights:

• Increased expenses: During Q1FY22, the company witnessed an increase in the total expenses to

CAD 560.66 million as compared to the total expenses of CAD 347.60 million in Q1FY21.  Operating expenses surged to CAD 100.76 million again in the same period (Q1FY22) against CAD 80.54 million in the pcp. Also, the increased losses on financial derivates, rise in deletion and depreciation, etc resulted in the higher total expenses which partially offsets the impact of increased revenue in Q1FY22.

• Lower liquidity profile: In Q1FY22, the company failed to report a quick ratio whereas the industry median was at 0.93x. The current ratio for the company in the same period (Q1FY22) was 0.53x which is lower than the industry median of 1.0x. The lower quick ratio and current ratio is an alarming indication that the company is not capable to meet its short-term obligations falling within one year time, which can hamper the business operations of the organization.

• Increase in royalties’ payment: The company saw an increase in the total royalties paid to CAD 122.72 million in Q1FY22 against the total royalties paid amounting to CAD 66.95 million in Q1FY21. Also, the average royalty rate increased to 19.4% in Q1FY22 against 18.2% in Q1FY21. To add more, the royalties per boe (barrel of oil equivalent) rose to CAD 16.86 against CAD 9.4 in Q1FY21. The increase in royalties paid reduced the overall revenue of the group which is a key negative. 

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported increased expenses to CAD 560.66 million in Q1FY22 against the overall expenses of CAD 347.60 million in Q1FY21. The rising royalties of CAD 122.72 million in the reported period (Q1FY22) against the royalties of CAD 66.95 million in Q1FY21, also putting downward pressure on the net revenues, which is a concern for the group. During Q1FY22, the % of long-term debt to total capital of the company was 36.6%, which is higher than the industry median of 25.0%, which is negative.  On the valuation front, the stock is measured on the EV/ Sales based multiple and we have considered Kosmos Energy Ltd., Oasis Petroleum Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of BTE at the last closing price of CAD 6.97 on May 31, 2022.

One-Year Technical Price Chart (as of May 31, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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