Baytex Energy Corp. Solid Finish to 2022
Our view: Baytex delivered solid financial results in the fourth-quarter with its Clearwater play supporting about 11,000 bbl/d of high margin oil production. Under the leadership of its new CEO, Eric Greager, we suspect that Baytex will become active in optimizing its portfolio over the coming year. We are maintaining a Sector Perform recommendation on Baytex and our one-year target price of $9 per share.
Key points:
4Q Results. Baytex Energy delivered solid fourth-quarter results amid in- line production of 86,864 boe/d and $144 million (before working capital) of free cash flow. The company repurchased $18 million of its common shares in the fourth-quarter via its NCIB, and reduced its net debt by $126 million.
Shareholder Returns. On the shareholder returns front, Baytex is currently allocating 25% of its free cash flow towards shareholder returns via its NCIB, and will move to 50% once its net debt falls below $800 million (anticipated in the third-quarter of 2023). The company’s net debt stood at $987 million as of December 31, 2022. Our 2023 base outlook factors in share repurchases of $275 million.
2022 Reserves. On a 2P basis, Baytex’s equivalent reserves fell 3% year/ year to 438 mmboe, reflective of non-core asset sales and adjustments in development plans and technical revisions associated with shale gas in the Eagle Ford. Baytex pegs its reserve life index at 13.8 years based on 2P reserves and 8.3 years based in 1P reserves.
Free Cash Flow. We peg Baytex’s free cash flow generation (including A&D) at $722 million in 2023 under our base outlook (US$92 WTI, US$23.56 WCS- WTI) and $415 million under futures pricing (US$75 WTI, US$18.29 WCS- WTI).
Relative Valuation. At current levels, Baytex is trading at a 2023 debt- adjusted cash flow multiple of 2.5x (vs. our North American intermediate peer group avg. of 2.6x) and a free cash flow yield of 25% (vs. our peer group avg. of 21%) under our base outlook. In our minds, Baytex should trade at an average cash flow multiple given its solid operating performance, strengthening balance sheet and rising shareholder returns.