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 production: For Q1FY22, the company reported an uptick in its total production which stood at 80,867 boe/d (barrels of oil equivalent per day) as compared to the 78,780 boe/d in Q1FY21, supported by the various successful development programs in the USA and Canada, including the improved results form Clearwater development program. The total liquids production during Q1FY22 was reported at 66,937 bbl/d, which is higher than the 63,657 bbl/d in Q1FY21.

• Industry beating profitability margins: In Q1FY22, the company reported an increased production across its major segments and were coupled with higher average realized sales prices, leading to the industry-beating profitability margins, which are depicted below.

Source: Refinitive, Analysis by Kalkine Group

• Strong liquidity: The group reported an increase in its cash flows from operations to CAD 198.97 million during Q1FY22 as compared to CAD 120.98 million in Q1FY21. Further, the group witnessed a surge in its free cash flow for a similar period, to CAD 121.31 million which is comparatively higher than the free cash flow of CAD 70.49 million in Q1FY21. The strong liquidity helps the company to meet its day-to-day operational expenses along with carrying out the expansionary plans as well. The company is targeting to deploy 25% of the free cash flows for its share buybacks.

Source: Company presentation

• Debt reduction: During Q1FY22, the company reduced its net debt by 10% to CAD 1.28 billion from CAD 1.41 billion for the year ended 2021. The group aims to use its free cash flows to reduce its net debt to CAD 1.2 billion by the end of Q2FY22.

Source: Company presentation

Risks associated with investment

The company is widely exposed to energy prices, whereas any sustained unfavorable movement in the energy prices, can hamper its financial health. Various other key risks for the company are foreign currency volatility, credit party risks, shortage of labor, economic slowdown impacting the demand for oil and gas, etc.

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• For Q1FY22 the group reported an increased revenues net of royalties to CAD 551.10 million against CAD 317.75 million during Q1FY21. The increase in production to 80,867 boe/d during Q1FY22 from 78,780 boe/d in Q1FY21 along with the increased average realized sales (net) for Q1FY22 was CAD 86.89/boe as compared to CAD 51.84/boe in Q1FY21, resulted in the increased revenue.
• The total expenses during Q1FY22 were increased to CAD 560.66 million against CAD 347.60 million in Q1FY21 on account of higher operating expenses and financial derivatives losses during the given period.
• The group posted net income of CAD 56.85 million during Q1FY22 as compared to the net loss of CAD 35.35 million in Q1FY21. A deferred tax recovery of CAD 67.33 million in Q1FY22, helped the company to transition into net income in the same period.

Valuation Methodology (Illustrative): EV to sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported staggering growth of 73.4% in its net revenues during Q1FY22 which stood at CAD 551.10 million against CAD 317.75 million during Q1FY21, supported by higher production and higher average realized sales price. Considering the growing demand for energy consumption and rising prices, the group is optimistic for FY22 and estimate to generate CAD 700 million of free cash flows in FY22, out of which 25% to be used for share buyback and the remaining to be utlised for the debt reduction from its books. On the valuation front, the stock is measured on the EV to sales based multiple and the stock is trading at 1.6x against the industry mean (Energy) of 4.5x, implying the stock is still having headroom to match its peers. We have considered MEG Energy Corp., Parex Resources Inc., etc as the peer group for the comparison. 

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the last closing price of CAD 6.09 on May 10, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 10, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Disclaimer

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