Baytex Energy (BTE-T) has reached a new 52-week low almost every day this week, sliding with oil prices. Close to four-fifths of Baytex's production is oil and liquids, based on February's total production of 66,000 to 70,000 barrels of oil equivalent a day. Of the oil and liquids production, nearly half is lower-margin heavy oil. None of this would be so problematic if Baytex were not also heavily in debt. As of Dec. 31, net debt was around $1.8-billion, well above Baytex's current market cap of about $990-million. Much of this debt came from an unfortunately timed acquisition, namely the $2.8-billion takeover of Aurora Oil & Gas in mid-2014, just before oil prices started to crash. Baytex bought Aurora for its shale assets in the Texas Eagle Ford, where Baytex now gets half of its total production (the rest comes from Western Canada). At the time of the takeover, Baytex's stock was worth around $50. Now it is worth less than one-10th of that.
Given all that, Baytex must have appreciated the nod of approval that it received yesterday from Moody's Investors Service. The credit ratings agency changed Baytex's outlook to "stable" from "negative" and upgraded the company by one notch to B3, although this is still deep in junk territory. Paresh Chari, an analyst at Moody's, said the upgrade partly reflects "higher commodity prices" -- a somewhat curious comment, given that WTI oil prices are at their lowest levels since November. Mr. Chari also likes Baytex's "solid margins from the Eagle Ford." He reckons that Baytex will be able to keep its production flat in 2017 by spending about $300-million, which he further reckons will lead to about $50-million in negative free cash flow. Baytex can handle this through debt, said Mr. Chari. He noted that Baytex's $1.5-billion in senior notes do not start maturing until 2021, and that the company is expected to stay in compliance with its debt covenants throughout this period. Baytex's overall liquidity is "adequate," the analyst concluded. "Adequate" is not good enough for investors, who continue to flee the stock.
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Baytex Energy's leverage continues to weigh on the stock even after the heavy oil producer managed to pay back 13 per cent of its debt over the course of the last year.
CIBC analyst Dave Popowich cut his 12-month price target on Baytex from $6 per share to $5.75 this week after the heavy oil producer reported that its reserves had decreased 9.2 per cent. Baytex reported the lower reserves and a fourth quarter net loss of $359-million Tuesday and the company highlighted the 13-per-cent reduction in net debt to $1.8-billion over the last year. Mr. Popowich, however, indicated that he was still uncomfortable with Baytex's leverage. "Although it is hard for us to get more bullish on the stock until we have seen meaningful signs of debt reduction, we concede that there are positive signs on the operational front," Mr. Popowich wrote and reaffirmed a neutral rating on the stock. He credited the company with spending 10 per cent less than estimated in the quarter and said that if oil prices range between $50 (U.S.) and $60 (U.S.) a barrel over 2017, the company could deliver on its growth objectives. |
