Why Baytex Energy Could Be a Buy

Falling oil prices have been a headwind for Baytex Energy [stock_market_widget type="inline" template="generic" color="default" assets="BTE.TO" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] for the past few months. Investors have fled the stock given the oil producer’s weak balance sheet, but its latest results indicate that there’s a possibility of a turnaround.

Although Baytex’s fourth-quarter fiscal 2018 results were negatively impacted by the oil price crash, the recent recovery in the price of the commodity seems to have given its operational profile a boost. Let’s see how.

Baytex Delivers Solid Production Growth

Baytex’s annual production increased 14% over the prior-year period

Baytex’s fourth-quarter production came in at 98,890 barrels of oil equivalent per day (BOE/day), up 42% from the prior-year period. Of this, 83% was oil and natural gas liquids. For the full year, the company delivered 80,458 BOE/day at a capital expenditure of C$496 million, exceeding the higher end of its production guidance. The annual production represents an increase of 14% over the prior-year period.

But despite this massive increase in the quarterly production, Baytex’s sales increased at a much slower pace of 20% to C$344.7 million, thanks to the lower oil price during the quarter. Moreover, its adjusted funds flow per barrel of oil equivalent fell from C$16.54 last year to C$12.17 in the fourth quarter of 2018, driven by a 22% decline in the operating netback per barrel of oil equivalent.

However, the recent oil price recovery is capable of breathing life back into Baytex stock, as the company has been encouraged to sustain its impressive production growth rate.

Oil Price Recovery Could Be a Tailwind

Baytex had slashed its capital budget for 2019 in light of the weak oil pricing scenario, calling for capex of C$550 million to C$650 million as compared to its original guidance for spending between C$750 million and C$850 million. What’s really impressive is that Baytex’s scaled down capital plan is still substantially ahead of what it spent last year.

As a result, the company’s production for the full year is expected to range between 93,000 BOE/day and 97,000 BOE/day. That represents an 18% increase over last year’s production, though it won’t be surprising to see Baytex breach that mark because of recovering oil prices.

In fact, Baytex recently clarified that its volumes for the first quarter of 2019 are trending way ahead of its forecast at more than 97,000 BOE/day. But that was not the only positive takeaway for investors from the latest quarterly report. The company has increased its adjusted funds flow forecast from the prior figure of C$605 million to C$800 million now.

The bump in the adjusted funds flow will allow Baytex to repay around C$200 million worth of debt, while maintaining the mid-point of its production guidance range.

Clearly, Baytex has been emboldened by the fact that WTI oil now trades at more than $56 per barrel as compared to $42 per barrel in December last year. So, if oil prices keep rising on account of the supply cuts being undertaken by OPEC and its partners and strong demand for the commodity, Baytex will be in a position to further increase output and also maintain a healthy funds flow level at the same time. This could help the stock turnaround and deliver more upside.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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