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:

• Strong outlook: For FY22, the company is estimated to generate approximately CAD 700 million (CAD 1.25/ share) of free cash flows. The group is committed to deploying 25% of the free cash flows to its shareholders through the share buybacks started in May 2022. The remaining portion of the free cash flows will be utilized to reduce the debt to an adequate level of CAD 800 million, yielding a net debt/ EBITA of 1.0x when fixed at the USD 55 WTI price. Also, for FY22, development and exploration expenditure have been increased in the range of CAD 450 million to CAD 500 million, which is revised from the range of CAD 400 million to CAD 450 million previously. 

• Strong liquidity: During Q1FY22, the company stated an increase in its cash flows from operations to CAD 198.97 million against CAD 120.98 million in Q1FY21. Further, the free cash flow increased to CAD 121.31 million or CAD 0.21/ share in the same period (Q1FY22) as compared to CAD 70.49 million  (CAD 0.13/ share). The increase in the cash generated from operating activities and free cash flows will help the company to manage its business operations smoothly and carry out its growth plans.

• Industry beating profitability margins: During Q1FY22, the group witnessed an increase in the revenue and production across its major segments which were further aided by the higher average realized sales prices, leading to the industry-beating profitability margins, which are depicted below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is majorly vulnerable to the energy prices and any sustained decline in the energy prices can severely dampen the company’s revenue. Further, the rising interest rates, currency volatility, economic slowdown, etc. are the other key challenges the company is facing.

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• During Q1FY22, the group reported an increase of 73.4% in the revenue net of royalties to CAD 551.10 million as compared to CAD 317.75 million in Q1FY21. The increased production clubbed with the higher average realized sales prices lead to the overall increase in sales during Q1FY22.

• The group posted an increase in the overall expenses to CAD 560.66 million in Q1FY22 against CAD 347.60 million in Q1FY21. The major increase from the higher operating expenses and increase in depletion and depreciation expenses during Q1FY22 against Q1FY21.

• For Q1FY22, the company narrowed down its net loss to CAD 9.56 million as compared to the net loss of CAD 29.84 million in Q1FY21.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company is optimistic in terms of the annual production guidance for FY22 and stated the total production to be between 83,000 boe/d (Barrels of oil equivalent per day) to 85,000 boe/d. The group also reduced the guidance on the expense front, where general and administrative expenses are estimated to be CAD 1.40 boe/d from the previous guidance of CAD 1.45 boe/d, and interest expenses are estimated to reduce to CAD 2.45 boe/d from the actual CAD 2.70 boe/d. The increased revenue and reduced net losses in Q1FY22 are signs of the improving top and bottom line, which is a key positive. On the valuation front, the stock is measured on the EV/Sales-based multiple, where the stock is currently offered at 1.8x as compared to the industry (energy) average of 4.1x, stating the stock is still deeply undervalued. We have considered Crescent Energy Co., Parex Resources Inc., etc. as the peer group for the comparison.  

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of BTE at the last closing price of CAD 6.88 on May 27, 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 of May 27, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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