SeekingAlpha shoutoutBaytex Energy: Debt Repayment In High Gear Dec. 29, 2021 3:03 PM ET
Baytex Energy Corp. (BTEGF)46 Comments27 Likes
Summary - Long-term debt is now in the C$1.5 billion area.
- Cash flow has more than doubled over the past year.
- Northwest Clearwater development should allow cash flow to grow even if production does not grow.
- Payback periods of all projects are fantastic in the current environment.
- Baytex common stock has an above-average future as the corporate breakeven declines.
Baytex Energy (
OTCPK:BTEGF) (BTE:TSX) began a debt repayment program that many thought would take years. But the strong commodity prices have accelerated the debt repayment process far beyond what many thought was possible a year ago. So, while it seems like the debt still needs to decline, it appears that the market is finally seeing an end to the lower debt program in the future. The prospects of the common stock price are beginning to improve.
Source: Baytex Energy Third Quarter 2021, Earnings Press Release.
Adjusted funds flow has more than doubled from the previous year. This has accelerated plans to repay debt. The result is that debt is far lower than was presently anticipated. Management has a goal of a debt ratio of long-term debt-to-EBITDAX of about 1.5. That appears to be a goal well within reach in a time frame that was never anticipated back when the goal was set.
So, what will happen now is that debt reduction will gradually decline in importance as that goal is reached while other possibilities like a dividend or share repurchases will slowly climb in priority. Those kinds of shareholder return possibilities will excite Mr. Market.
Furthermore, management has a game-changing development that will probably result in more production using less capital than was anticipated.
Source: Baytex Energy December 2021, Investor Presentation.
This discovery has a breakeven that is nearly US$10 below the breakeven of the main heavy oil business that this company began with. Any drilling here has a faster payback due to the greater profitability. Furthermore, this discovery (even though it is heavy oil) can cash flow at considerably lower commodity prices than can the legacy production. This discovery will result in a major reduction in corporate breakeven as the production becomes material to the company.
The latest two wells actually advance the initial production rates. That could reduce the future payback period more if those results can be reliably replicated. So, the possibility of even stronger profitability in the currently favorable commodity price environment is a good possibility.
A discovery this profitable will allow the company to grow cash flow by switching from higher cost development to this discovery. Then production does not have to grow for cash flow to increase and earnings to improve. This discovery has the potential to become most of the company cash flow in Canada for the heavy oil division.
When management announced the budget for fiscal year 2022 and emphasized free cash flow, it is expected that this discovery will have an increasingly material part of the company's future free cash flow.
Management has made a deal (or more) to lease more acreage so that production from this new area will be significant to the company in the future. Interestingly, the numbers are excellent when one considers that heavy oil is traditionally sold at a discount to the WTI benchmark. So, production has to be all that more efficient to include the discount while maintaining the low breakeven point.
Source: Baytex Energy December 2021, Investor Presentation.
This project is probably the next most important to investors of the Canadian-operated properties. The breakeven is relatively high for a light oil project. But the advantage of light oil is that management does not have to worry about a potentially expanding discount to WTI when pricing becomes weak. So, this project generally will cash flow better during downturns than will heavy oil with the same breakeven price.
That breakeven price includes pricing assumptions. But oftentimes discounted products suffer worse-than-expected pricing declines and turn cash flow-negative when a slide does not indicate that should be the case.
Management has been working on increasing reserves and initial flow rates with the wells as shown above. So far that progress has not been enough to decrease the breakeven point shown above.
Source: Baytex Energy December 2021, Investor Presentation.
The Eagle Ford is not only important for the low breakeven and the cash flow. This business also supported the issuance of debt denominated in United States Dollars. While the financial results often show debt values fluctuating with currency exchange rates, the actual business probably has no fluctuation because the cash flow from this United States location probably supports the debt issued.
Management has been repaying the United States debt during this period of strong pricing. That would make a lot of financial sense because the Canadian debt has a lower value than does the United States debt. If this strategy continues, then eventually strong United States dollars can pay cheaper Canadian debt. That should benefit shareholders in the long run.
The heavy oil has a sharper profit trajectory and is often more profitable during times of very strong commodity pricing. However, the most reliable cash flow is from the Eagle Ford. So, when pricing is weak during a cyclical downturn, the Eagle Ford has been the main source and sometimes the only source of cash flow near the bottom of an industry cycle.
The importance of the low breakeven heavy oil discovery is that the discovery adds another potentially significant source of funds flow when commodity prices are weak. That would provide a significant safety cushion as many heavy oil producers suffer unusually low cash flows near industry bottoms.
Source: Baytex Energy December 2021, Investor Presentation.
The last major consideration has to be this light oil discovery. The initial production rate is finally becoming competitive. Well costs are still much too high at C$7 million. So, work needs to be done there to bring well costs into line. It will probably be a few more years of experimenting with well designs and completion techniques before this discovery can be commercially developed.
In the meantime, there is the promise of another light oil play to help tide the company through industry downturns.
The Future Now that cash flow is in the C$200 million range while long-term debt has declined to roughly C$1.5 billion, the magic debt ratio number is now below 2. That is important to Mr. Market and accounts for some of the recent common stock price strength.
Management will likely bring debt to a much lower level because ratios have a tendency to expand considerably when commodity prices weaken. Still, this company is far ahead of a lot of competition when it comes to debt reduction.
So, for the first time in a long time, a potential dividend and share repurchases are possible in the future. Debt reduction will continue, but increasingly smaller amounts are likely to be allocated to that goal once long-term debt gets closer to the C$1 million mark.
There are some very good potential projects that promise to increase cash flow and profitability without the need to grow production. So, company could show good financial progress even though production growth will not be a possibility for some years unless technology advances allow for it. In the long run, such technology advances are more likely to allow for a lower capital budget the following year.
This stock has come a very long way. Now there are some very good possibilities for the future regardless of where commodity prices go.
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