
Oil prices in the U.S. have shot up 32% in the first quarter, which is the strongest rise seen in the first quarter of the calendar year for the past decade. The rise in oil prices has been aided by the proactive supply cuts being undertaken by OPEC and its allies.
Now, it is likely that the oil price rally will continue as the ongoing supply cuts will keep a lid on the oversupply. In such a scenario, it makes sense to take a closer look at the likes of Baytex Energy [stock_market_widget type="inline" template="generic" color="default" assets="BTE.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], Berry Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="BRY" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], and Southwestern Energy [stock_market_widget type="inline" template="generic" color="default" assets="SWN" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] as all three companies are well-placed to take advantage of improved pricing. Let’s see why.
Baytex Energy
Baytex Energy’s solid production growth was negated by lower oil prices in the second half of 2018. For instance, the company delivered a 42% annual increase in its output for the final quarter of 2018, but because of lower oil prices, its top line increased just 20% year over year.
In fact, low oil prices not only hurt the company’s top line, they also hurt its funds flow from operations. A 22% drop in Baytex’s operating netback per barrel of oil equivalent and shrinking of the company’s adjusted funds flow per BOE from C$16.54 from C$12.17 have been enough to dent investor confidence.
However, the good part is that Baytex can make a strong comeback in 2019 as oil prices are improving and the company is on track to increase its production once again this year. Baytex estimates oil output in the range of 93,000 and 97,000 BOE/day for 2019, which would be an increase of 18% at the mid-point when compared to the 2018 production of 80,458 BOE/day.
What’s even more impressive is that the increase in the company’s production will be achieved at a capital budget of C$550 million to C$650 million. This is lower than Baytex’s original capital expenditure guidance of C$750 million to C$850 million. Thanks to the disciplined capital spending plan, Baytex believes that it can now deliver adjusted funds flow of C$800 million for 2019 as compared to the earlier forecast of C$605 million.
Baytex will direct the higher funds flow toward extinguishing its debt to the tune of C$200 million. So, higher oil prices will turn out to be a boon for Baytex Energy as the company will not only be able to post stronger financial growth, but also improve its balance sheet.
Berry Petroleum
Improving oil prices are already rubbing off positively on Berry Petroleum, with the stock rising more than 30% in 2019 so far. The company did extremely well last year thanks to strong oil price levels and production of 27,000 barrels of oil equivalent per day.
This year, Berry believes it can clock production of 28,000-31,000 BOE/day, 86% of which will be oil. According to the mid-point of that guidance range, Berry’s output will increase 10% in 2019, while capital expenses are expected between $195 million and $225 million. This represents an increase over last year’s capital expenses of $148 million, so Berry’s capital outlay is going to increase significantly.
In such a scenario, the company will need the aid of stronger oil prices in order to perform well. Last year, Berry had reported an average realized oil price of $64.76 per barrel of oil equivalent as compared to the 2017 average realized price of $48.05 per BOE. The higher oil prices also boosted the company’s adjusted EBITDA from $178 million in 2017 to $258 million last year.
If oil prices start heading lower, Berry will find it difficult to repeat its performance. But if WTI crude oil is trading at nearly $61 per barrel and has the potential to move higher, Berry Petroleum investors can expect more upside from the company as it did well last year when prices were strong.
Southwestern Energy
Southwestern Energy has also been in great form on the stock market this year thanks to rising energy prices, which will allow it to take advantage of its improving production profile. For instance, the company’s revenue for the fourth quarter of 2018 was up 46% annually and trumped Wall Street’s forecast by $200 million.
Now, 83% of Southwestern’s production is composed of natural gas. Last year, the company produced 946 billion cubic feet equivalent (Bcfe), an increase of 5.4% over the prior year. After adjusting for the Fayetteville sale, Southwestern’s annual production was 703 Bcfe.
The company expects production of 750-785 billion cubic feet (Bcfe) in 2019, a jump of 9% over the prior year. Moreover, the increase in production this year will be achieved at a lower cost base. Southwestern expects 25% in its average well costs this year to $875 per lateral foot. What’s more, the average lateral length is on track to increase to the tune of 35% this year.
As a result of these lower costs, Southwestern’s capital expenditure for 2019 will be $1.13 billion as compared to last year’s outlay of $1.25 billion.
Meanwhile, NYMEX natural gas is currently trading at nearly $2.70/MMBtu, which is lower than Southwestern’s assumption of $2.85 per MMBtu. However, the EIA expects that natural gas prices will eventually hit $2.85/MMBtu in 2019.
So, Southwestern Energy’s performance will depend on the direction natural gas prices take this year. The good part is the EIA expects a gradual uptick in gas prices going forward, which should act as a tailwind for the company in light of the potential increase in its production.
Additionally, Southwestern’s funds flow from operations should also get a shot in the arm thanks to lower costs. As such, Southwestern investors have enough reasons to remain invested in the stock because of the tailwinds discussed above.
Conclusion
Baytex, Berry, and Southwest might not be very well-known names, but all three companies give investors three different ways to capitalize on higher prices. In all, it makes sense to take a closer look at these three oil stocks as they are focused on improving their production efficiently.