Baytex Energy Corp. Update with Eric Greager
Our view: Our bullish stance toward Baytex reflects the company’s solid leadership team, increased scale in the Eagle Ford following the Ranger deal, and rising shareholder returns. We are reaffirming an Outperform rating on Baytex and our one-year target price of $8.00 per share.
Key points:
Our recent discussion with Baytex Energy’s President & CEO, Eric Greager and SVP, Capital Markets and Investor Relations, Brian Ector, delved into the company’s integration of Ranger Oil and highlighted the 90-95 wells coming on-stream across its portfolio in the third quarter. Priority-wise, Baytex remains focused on operational execution, net debt reduction and shareholder returns.
Eagle Ford in Focus. Following the closing of its US$2.2 billion acquisition of Ranger Oil in June, the company plans to bring 18 net wells on-stream in the Eagle Ford during the third quarter on acquired Ranger lands. Baytex is also progressing its optimization work in the Eagle Ford, which includes debottlenecking gas gathering and optimizing artificial lift systems.
Juniper Lock-Up. Juniper Capital Advisors entered into an agreement on September 18 to dispose of circa 51.2 million common shares of Baytex by way of a block-trade. Juniper remains in a staggered holding period agreement in which one-third of the remaining Baytex shares issued to Juniper are in a three-month escrow period (until December 17, 2023) and the remaining one-third is subject to a six-month escrow period (until March 16, 2024).
Shareholder Returns. Baytex’s enhanced return of capital framework was locked into place upon closing of the Ranger Oil acquisition on June 20. As it stands today, the company is currently allocating 50% of its free cash flow toward shareholder returns following the renewal of its normal course issuer bid (NCIB) on June 23.
Free Cash Flow. In 2024, we peg Baytex’s free cash flow (before dividends and excluding A&D) at $1.37 billion under our base outlook (US$81 WTI, US $12.26 WCS-WTI) and $1.35 billion under futures pricing (US$81 WTI, US $16.29 WCS-WTI).
Relative Valuation. Under futures pricing, Baytex is currently trading at a 2023E debt-adjusted cash flow multiple of 3.0x (vs. our North American intermediate peer group avg. of 3.8x) and a free cash flow yield of 17% (vs. peers at 10%). On the basis of 2024E, the company is trading at a debt-adjusted cash flow multiple of 1.7x (vs. peers at 3.1x) and free cash flow yield of 33% (vs. peers at 14%). In our minds, Baytex should trade at an average cash flow multiple given its solid operating performance, strengthening balance sheet and rising shareholder returns.