Baytex Energy Corp.
(BTE-T, BTE-N) C$4.64 | US$3.44
No Q1/23 Surprises; ROCC Closing Just Around the Corner
Event
Announced Q1/23 results. Conference call at 11 a.m. ET (webcast).
Impact: NEUTRAL
Results somewhat overshadowed by looming closing of ROCC acquisition in Q2/23: Recall, closing triggers a doubling of shareholder capital returns to 50% from 25%, including reinstatement of a $0.09/sh annual dividend (1.9% pro forma yield). While BTE met its 25% commitment in 2022 (4.3% of shares repurchased), no capital was returned in Q1/23 since buybacks were placed on hold given the pending merger. However, BTE plans to play catch-up through buybacks/dividends to fulfill its 2023 commitment (first dividend payable in October).
We consider the deal risk low and see more positive deal attributes than negative ones—to this end, we upgraded BTE following the announcement (note).
Q1/23 production in-line, FFOPS falls a bit short on higher-than-expected cash taxes and transportation costs (Exhibit 1): 2023 guidance is intact (86-89mboe/ d, $570-650mm) but does not capture ROCC, and will be updated on closing (we model mid-June 2023).
Peavine Clearwater continues to deliver: Q1/23 production averaged 11.8mboe/ d (Q3/22—8.2mboe/d; Q4/22—11mboe/d) with 12 net wells brought onstream (39% of 31 net wells planned for 2023). The 12 wells produced at an average 30-day IP rate of 661bbl/d, and BTE now holds 19/20 top wells in the play.
Despite Peavine economics being the strongest in the portfolio, BTE remains committed to plateauing production at 12-15mbbl/d, the low end of which likely gets achieved this quarter. Thereafter, activity could increasingly shift south (into the Eagle Ford) given: 1) ample runway (741 net drilling locations/12-15 years sustaining development) and 2) competitive asset economics (second only to Peavine and non-operated Eagle Ford in Karnes County).
TD Investment Conclusion
In our view, the entry point on BTE shares remains fairly attractive with a strip 2024E FCF yield of 15% vs. peers at 10%-25%. Further, the ROCC deal significantly increases BTE's overall capital flexibility and drilling inventory in a play/region with strong commodity fundamentals and very good access to regional and global markets. The imminent doubling of its return of capital commitment to 50% on closing and reinstatement of a base dividend should also serve as tailwinds.