Baytex Energy (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”BTE.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) has fallen prey to declining oil prices, where shares of the Calgary-based oil and gas company have nearly halved in value over the past six months due to the oil market’s unfavorable supply-demand dynamics.
However, recently oil prices have been showing signs of life since December 2018, as major producers have decided to keep a handle on supply to support prices and prevent further inventory build-up. Despite that, Baytex Energy’s stock price continues to tumble in 2019, and the culprit is its weak balance sheet.
Baytex Energy’s Balance Sheet Weakened by Debt
Baytex Energy’s balance sheet clearly indicates that the company is cash-strapped and laden with debt. It held just $45 million in cash at the end of the last-reported quarter, while its debt was a staggering $2 billion.
As it turns out, Baytex has based its 2019 capital expenditure forecast of $550-650 million on a West Texas Intermediate (WTI) crude oil price of $52/barrel and a production estimate of 93,000-97,000 barrels of oil equivalent per day. This could be an optimistic forecast as WTI oil fell to as low as $42 a barrel toward the end of December, although it has recovered to nearly $54 a barrel as of this writing. Overall, Baytex Energy’s capital expenditure plan for 2019 is hanging in the balance as the oil price is close to the company’s budgeted levels.
Now, if oil prices decline below the $52/barrel threshold, Baytex will have to slash its capital spending this year below the budgeted levels, else it might have to take on more debt to support the same. If Baytex chooses the latter option, its debt load will increase, and so will the interest payments. That doesn’t look like a good option considering the company’s shaky balance sheet.
As it turns out, Baytex has slashed its 2019 production plans once already. The company originally expected to spend $750-850 million on capital expenses in 2019 to produce 100,000-105,000 barrel of oil equivalent per day, which means that it has already reduced its spending estimate by a big margin. So, if oil prices keep moving in the wrong direction, it won’t be surprising to see more cuts on Baytex Energy’s behalf, further negatively impacting the production profile.
Baytex Energy’s Value as Dependendable as Oil Price
Clearly, Baytex will struggle if oil prices fall below $50 a barrel. There has been some optimism in the end market thanks to the decision by OPEC and its allies to slash production by 1.2 million barrels per day. But then, demand for oil could remain muted on account of macroeconomic uncertainty.
The industrial slowdown in China and the addition of new rigs by U.S. oil producers have put oil prices in a tough spot once again. The trade stand-off between the U.S. and China is expected to stretch further, damaging China’s economy in the process. That’s bad news for oil demand as the Asian giant is the world’s largest importer of crude oil.
Additionally, U.S. drillers added 10 new oil rigs in a single week toward the end of January, a move that’s likely to add to the inventory glut. So, there’s a good chance that Baytex Energy will scale back its 2019 plans once again and dampen investor sentiment in the process. As such, it will be prudent for investors to avoid Baytex Energy as oil market uncertainties and a weak balance sheet could eliminate its chances of a turnaround.
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