Baytex Energy Corp T.BTE

Desjardins highlights 2022...

[red2000]

Worth the reading, more coming about  US shale oil drilling... don't be afraid of it ! 

Highlights

A little Finesse can go a long way. The reality is that despite the strong performance of Canadian energy in 2021, the sector is still lagging the S&P/TSX 60 by 125% (excluding dividends) over the last decade. While we recognize investor concerns of a potential pullback, we firmly believe that industry’s newfound focus on shareholder returns and capital discipline, backed by FCF yields well into the midteens for most producers at strip pricing, will ultimately pave the way for a solid 2022 for the Canadian energy sector.

Oil set to Garnier even more attention in 2022. Oil prices generally outperformed our expectations this year, due in large part to prudent market stewardship by OPEC+ and the successful rollout of vaccines. Our current 2022 forecast for US$70/bbl WTI and US$75/bbl Brent is now slightly above the current strip on the heels of the recent price meltdown following the emergence of Omicron. However, we are now firmly biased toward the upside relative to our current deck, as we believe the prospects for the return of triple-digit oil prices are growing moving into 2023–24 and could arrive by as early as next summer under the right conditions.

Early headwinds for natural gas in 2022, but Dove you still believe? Our 2022 NYMEX price forecast of US$5/mmbtu is now significantly above the current strip following the recent emergence of an extremely mild December weather forecast. Although stronger prices are expected to emerge with the onset of colder temperatures, we are now biased toward the downside relative to our current deck. Depending on temperatures through the balance of winter, we now project a US storage carryout of ~1,000–2,000 bcf next spring. That said, a mild winter would likely result in NYMEX prices averaging US$3.00–3.50/mmbtu—a level that we still regard as highly supportive for most Canadian natural gas producers.

Oil—set to Garnier even more attention in 2022
Oil prices generally outperformed our expectations this year, due in large part to prudent market stewardship by OPEC+ and the successful rollout of vaccines throughout most of the developed world and large parts of the developing world.

Despite lingering weakness in international air travel, which could be exacerbated by the recent emergence of the Omicron variant, global petroleum demand is generally expected to surpass preCOVID-19 levels at some point in 2022.

Although drilling activity has accelerated sharply following the return of normalized oil prices, rig counts are still materially lagging pre-COVID-19 levels, both in the US shale basins and overseas, which is eventually expected to result in a material supply deficit, potentially as soon as next summer.

OPEC+ has delicately managed oil markets this year, which helped drain surplus inventories while tightening supply balances. Last week’s decision to carry through with its planned 400 mbbl/d production hike in January, while also leaving flexibility to quickly adjust output if demand destruction accelerates, is a continuation of that trend. However, there is growing skepticism that OPEC+ can meet its output targets as it moves closer to fully restoring production back to capacity, with several member states (particularly in Africa) already struggling to meet their existing quotas.

The COVID-19-induced glut in global petroleum inventories has now been worked down through a combination of recovering demand and OPEC+ supply discipline, resulting in widening deficits for crude oil and refined products, both in the high-frequency US market and abroad.

Beyond the potential for further demand shocks arising from new COVID-19 variants, the single greatest wildcard for oil prices in 2022 from our perspective would be a thawing of US–Iran relations. Nuclear proliferation talks recently resumed in Vienna, which could eventually put ~1.5 mmbbl/d of additional crude supply into the market in addition to allowing the Islamic Republic to drain more than 60 mmbbl from floating storage.

Our current 2022 forecast for US$70/bbl WTI and US$75/bbl Brent is now slightly above the current strip on the heels of the recent price meltdown following the emergence of Omicron. However, we are firmly biased toward the upside relative to our current deck as we believe the prospects for the return of triple-digit oil prices are growing moving into 2023–24 and could arrive by as early as next summer under the right conditions.

Looking at oil prices in western Canada, differentials have been a key flashpoint for the better part of the last decade. While our takeaway constraints have not yet been resolved, the recent start-up of L3R provides much-needed flexibility to the pipeline network.

Despite the recent shutdown of Trans Mountain amid flooding in BC, which drove wider WCS differentials, this issue has now been resolved, likely resulting in a move back to the US$12–15/bbl level (barring any further unexpected operational issues). The bottom line is that we don’t see western Canadian differentials being a major concern as we roll into 2022.

While there have been no shortages of bumps along the road, including the recent meltdown following the emergence of the Omicron variant, by and large, oil prices have outperformed even our wildest expectations this year. Recall that 2021 opened with a bang after Saudi Arabia announced a surprise unilateral 1 mmbbl/d production cut in early January, which Energy Minister Prince Abdulaziz bin Salman branded as a ‘New Year’s gift’ to the oil market.

Oil prices never really looked back from there, beginning a remarkable ascent to ~US$85/bbl in late October from ~US$45/bbl, before checking back in recent weeks following the coordinated release of supply from strategic petroleum reserves and the emergence of the Omicron variant.

But even with the recent pullback, 2021 has been by all accounts a very good year for oil prices; from our perspective, it will eventually be looked back upon as the opening act of a multi-year bull rally. The best is yet to come for oil prices.

[BayStreetWolfTO]

Red, good read and great share. thanks.