Baytex changing dynamics To all longs, and what it is to be long.
I have been reading select messages on the board. There is a lot of good opinions, and it appears to me, there is only one observation I can make. Baytex is being considered with static, or snapshot methods of worth. This observation is not true in every post, just some of them. There is a lot to be optimistic about, if you consider the changing dynamics. I am going to present some of them.
Sector Rotations
Baytex has yet to benefit from sector rotations. With free cash flow eliminating debt at break-neck speed, Baytex is going to look better every quarter, than previous quarters, until their products are perceived to be declining in value, long term. Institutions will be looking to rotate in to new positions like Baytex, once selling criteria has been met in their other holdings. As popular as passive management is, there are still funds that actively manage. Sector rotations will happen, and Baytex will benefit from them in the future.
Ratios of institutional ownership
Baytex is 9%-11% owned by institutions, while Berkshire Hathaway owned Occidental Petroleum, is 77% owned by institutions. That is a huge difference. If Baytex had 77% institutional ownership, the share price would be near fair value or higher, and still heading higher. While we are on the topic of value, here is one I don’t agree with.
Enterprise value = market capitalization + total debt - cash and cash equivalents
Only Banks would see debt as valuable, because they derive income from it. In the formula above, I would calculate it using market capitalization + cash and cash equivalents - total debt. For humor purposes only, call it REV, or REAL Enterprise Value! Based on this method of calculation, Baytex is REVing up REALvalue!
Why is Baytex under owned by institutions, and will that change? Because Baytex does not currently meet rules required for some institutions to own it. There is also the perceived high debt, and lack of dividend, for now. This is a great advantage to those institutions that can own it, like Ninepoint, with their 27 million shares and growing. This brings us to consider our board member who looked into NYSE listing requirements yesterday. I spent some time a couple of months back looking for rules and conditions for relisting. Baytex has the price requirement of $4.00 for thirty days locked in now. The 18 months needed has not. This is a big consideration for institutional ownership. If the stock is not listed on the big exchanges, Baytex can not be owned by every institution. If it is possible to pay money to expedite the 18 months, I can’t see Baytex paying it.
Reducing outstanding shares and float
As shares are bought back and eliminated, the float will decrease at a greater rate, or percentage than outstanding will. Add increasing institutional ownership over time, and the float will decrease much more rapidly, in percentage terms. This is why Baytex share price is going to be higher in the future than it is now. This changing dynamic facilitated by increasing institutional ownership, and company buy backs, will make it more costly to acquire shares later.
Increasing cost of product, increasing CAPEX
I expect capex of 450 Million to continue for 2023, as rig counts have not increased like predictions have suggested, in the past few months. With a similar 2023 capex as allocated for 2022, Baytex daily BOE will increase. It has been covered thoroughly on this board, why supply/demand in crude oil are favorable for at least 18 more months.
Debt Levels of $1.2 Billion and $800 Million.
While we are already closing in on 1.2 Billion in debt, and already know what the plan is for that level, it is time to focus on what $800 Million is about. Here are my thoughts.
1. A point at which a better debt deal at much lower interest, and less limitations, could be available.
2. A more aggressive buyback percentage applied for with the exchange.
3. A dividend paying level.
4. A meaningful ratio that facilitates a production capex increase, that was not possible until this level is met.
As longs, time is on our side, even if it looks like a higher share price, should be present now.
We are right, so we sit tight.
RS
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