Baytex Energy Corp

Baytex Energy Corp (TSX: BTE) is a Canada-based oil and gas exploration company which operates through the exploration, development, and production of crude oil and natural gas across Canada and the United States. The Group derives the majority of revenue from the Canadian market and rest from the United States.

Q2FY20 Financial Highlights: BTE declared its quarterly results, wherein the Company posted revenue of CAD 123.533 million, as compared to CAD 395.383 million in the previous corresponding period (pcp), due to a soft demand scenario coupled with a steep decline in the crude oil prices. The decline was primarily attributed to the lower realized price of CAD 22.31 /boe against CAD 51.49/boe in Q2FY19. During the quarter, production declined to 72,508 boe/day in Q2FY20 from 98,402 boe/day in pcp. Total expenses stood lower at CAD 240.905 million as compared to CAD 317.617 million in pcp, primarily due to significantly lower depletion & depreciation, lower operating expense, a significant decline in both blending & other and transportation costs coupled with higher foreign exchange gains. However, a financial derivatives loss of CAD 55.662 million as compared to a financial derivative gain of CAD 27.666 million act as a drag. Net loss before income taxes tumbled and stood at CAD 117.372 million, as compared to a profit of CAD 77.766 million, due to a significant slide in the top-line, partially offset by lower expenses. The Company reported a net loss of CAD 138.463 million, against a net profit of CAD 78.826 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The operations of the group are highly exposed to the volatility in the crude oil prices, and any downside in the oil prices would take a toll on the BTE’s financial performances. Extension of the shutdowns due to the second phase of COVID 19 could dampen the demand further and impact the crude oil prices.

Stock Recommendation: The stock corrected ~64% so far this year due to a steep price correction in the international crude oil. The company has strategically lowered its FY20 capital expenditure in order to support the working capital requirements, which is encouraging. The group expects annual capital spending in the range of CAD 260 to CAD 290 million, an approximate 50% reduction from the original plan of CAD 500 to CAD 575 million. The company generated positive free cash flow during the quarter and maintained approximately CAD 300 million of financial liquidity. The group do not have any debt maturity until June 2024. The group restarted approximately 80% of the previously announced shut-in volumes, which is likely to positively impact adjusted funds flow for the remainder of the year. The group remained focus on driving efficiencies to capture or sustain cost reductions identified during the challenging time. 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. The BTE stock is trading at a lower valuation and is available at forward P/CF of 1.2x as compared to the industry (Oil & Gas) median of 2.7x on NTM basis. Though we expect a recovery in demand for oil, however, it would take some time to reach it to pre-pandemic level. Further, the second wave of COVID-19 would be catastrophic for oil companies. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ recommendation at the closing price of CAD 0.67 on August 5, 2020.

BTE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Secure Energy Services Inc.

Secure Energy Services Inc. (TSX: SES) provides integrated treatments and disposal service to the oil and gas industries which constitute midstream services, environmental services, systems and products required for the drilling, production and other specialized services and products. 

Q2FY20 Financial Highlights: Secure Energy Services declared its quarterly numbers and reported a decline in the top-line. Revenue stood at CAD 291.190 million as compared to CAD 788.848 million in the previous corresponding quarter. The decline was primarily attributable to a drastic decline in the crude oil price coupled with lower sales volumes. Adjusted EBITDA stood at CAD 20.453 million, reflecting a fall of 42% on y-o-y basis, primarily attributable to declining revenue, partially offset by cost reduction strategies to align the Group’s fixed cost structure with current activity levels. The cost-cutting includes organizational restructuring and associated personnel lay-offs, salary reductions, and restricted discretionary spending across all operating segments. Net loss, during Q2FY20 widened to CAD 20.889 million, from a net loss of CAD 1.678 million in the previous corresponding period (pcp). The Group reported cash flows from operating activities of CAD 22.1 million during the second quarter of FY20 compared to CAD 53.9 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is related to the demand and price of crude oil. Any volatility in crude oil prices or setback to demand would hamper the group’s performance.

Valuation Methodology: Price/CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The SES stock corrected ~67% so far this year and is quoting close to the lower band of its 52-weeks trading range of CAD 0.64 and CAD 6.77.  The second quarter was challenging for the company; however, the group was able to partially mitigate the reduced market optimization opportunities by capitalizing on its significant crude oil storage positions at the Kerrobert and Cushing facilities. The group recorded stable revenue provided by contracted volumes associated with its oil feeder pipelines and pipeline-connected produced water disposal facilities. Further, the group implemented several cost restructuring strategies, and the group anticipates a CAD 40 million reductions in the cost of sales and general and administrative expenses on an annualized basis. As a result of the cost-cutting strategies, the Adjusted EBITDA margin improved 5 percentage points to 31% during the quarter despite the decrease to revenue. The group was focusing on liquidity preservation and reduced its monthly dividend from CAD 0.0225 per share to CAD 0.0025 per share beginning May 2020. This reduction results in annualized cash savings of approximately CAD 38 million.

Crude oil prices stabilized near the end of the second quarter of 2020 following indicators of a gradual economic recovery as lockdowns associated with COVID-19 eased across the globe, leading to increased energy demand, which bodes well for the group’s financial performance. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Ensign Energy Services Inc, Enerflex Ltd, Precision Drilling Corp etc. Though we expect a recovery in demand for oil, however, it would take some time to reach it to pre-pandemic level. Further, the second wave of COVID-19 would be catastrophic for oil companies. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.65 on August 5, 2020.

SES Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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