RE:RE:RE:Shocking share price todayBefore I say anything, for disclosure purposes, I'm long Baytex and have been since last year.
Based on what I can see from their Q3 2015 financials, here are my thoughts, so please chime in where you see fit.
Question: Why this is dropping so fast?
1. Baytex is a pure play with substantial production from Alberta that is exposed to Western Canadian Select price, which is 30-40% less than WTI. With limited hedging, Baytex is vulnerable to drop in crude prices. Hence, as crude prices continues to see downward pressure, we will see Baytex suffer.
Question: Will Baytex bankrupt?
1. In my honest and sincere opinion, Baytex is far down the list of companies that may face bankrupcy. They will likely be bought out before anything (I do not want to see that happen as I see far greater value in Baytex once oil recovers)
2. As I've stated months ago, Baytex has ~$1 billion in undrawn credit facilities as of Q3 2015 and not due until 2019. Plus long-term debt are not maturing until 2021, giving Baytex some much needed breathing room for oil to recover.
3. As of Q3 2015, Baytex issued more equity and paid down some bank loan. With dividend cut and expanision capex cut, cash burn for the year will likely be capped within $200-300 million. Again, this is manageable with the current credit facilities in place.
Question: What if oil drops to $20?
1. This may well be the case and certainly will not be good for Baytex. However, as anyone who has some familiarity of the crude market knows, crude below $30 is not sustainable and even Saudi is suffering in these prices... so will that stay long? Likely not, but the world is filled with crazy people.
2. Iran oil... this is really stupid in my opinion. They have been selling regardless of the sanction and if the world is "drowning" in oversupply, who the heck is absorbing that excess supply? At that point, they might as well giving them out for free and what's the point? Long story short, this price will not sustain.
Question: What is Baytex worth?
1. I haven't done any valuation yet, but I simply take the assets on the book ($5.2 billion or so), and discount by 2/3, which is about how much crude has fallen since the $100+ days. Divide that by shares outstanding, we still have a $8.6/share valuation. Albeit, this is a very rough estimate, but valuing baytex's assets at 30cents on the dollar is fair in this environment. At $1.95/share today, I really feel Baytex is very undervalued.
Question: Will Baytex recover even if Oil recovers?
1. I think so. Baytex's eagle ford asset appears to be low cost and fairly effcient asset (correctly me if i'm wrong). Once oil recovers, Baytex holds some of the better assets in Alberta and Texas. This will help Baytex as crude prices recover and as Baytex muscle up more operating cash to ramp up expansion capex.
I just bought more at $1.95/share. I admit, this is going to be one scary ride, but I still firmly believe that this is going to see better days in the near to medium term.
Again, please chime in on your thoughts!