Date: January 29, 1998
BAYTEX ENERGY LTD. [BTE.A (T), $15.40]
Recommendation: BUY
The common shares of Baytex Energy have recovered quite strongly in
the past couple of days, up $1.90 to $15.40 per share or 14%. So they
should have, in our opinion, as they were looking quite cheap
relative to the cash flow outlook we see for this Company in 1998.
Currently, we estimate fully diluted cash flow for Baytex Energy in
1998 of $3.24 per share as compared with an estimated $1.93 per share
for 1997 (pro forma for the pooling of Baytex with the former Dorset
Exploration). This growth in cash flow is foreseen despite lower
commodity prices estimated for the Company this year. That is because
this year's planned capital spending of $250 million will yield
above-average growth in production volumes. Based on this cash flow
outlook for 1998, we hold out a price target for this stock of $18.70
per share. Accordingly, we recommend these shares as a Buy.
Our earnings and cash flow estimates are as follows:
1997(e) 1998(e)
Daily Production Crude Oil/NGL - b/d 9,000 18,700
Natural gas - mmcf/d 90.0 163.0
BOE (10-1) - boe/d 18,000 35,000
General Oil Prices WTI US$/bb l20.60 18.00
Par crude - $/bb l27.66 24.66
BTE's Prices Crude Oil/NGL - $/bb l21.16 18.23
Differential - $/bbl 6.50 6.43
Natural gas - $/mcf 1.80 1.75
Reported Cash Flow $ millions 63.324 113.742
$ per share - basic 2.01 3.38
- f.d. 1.93 3.24
Net Income $ millions 8.907 13.832
$ per share - basic 0.28 0.41
- f.d. 0.28 0.40
Shares O/S - mm Basic 31.533.7
F.D. 33.035.2
While Baytex Energy originally intended to spend $250 million on
exploration and development in 1998, including the drilling of 335
net wells, this plan is under review considering the present weakness
in commodity prices. The Company's Board of Directors has approved
initial spending of $150 million and approximately two-thirds of that
will, in fact, be spent in the first quarter. Baytex Energy's
management feels it might be prudent to keep up to $100 million in
reserve for acquisitions, as it feels many properties and/or companies
may come on the market in this environment. To the extent the Company
pursues this strategy, there could easily be changes in the
production mix given above. For example, there could be more gas
production as a result of acquisitions and less oil production as it
is probably quite logical to assume that the Company's planned
spending on heavy oil projects at Soda Lake/Carruthers and Superb in
western Saskatchewan could be deferred because of low heavy oil
prices. Despite the potential variability in our production
estimates, there is no doubt that Baytex is going to report very
strong growth in 1998.
Some of the plays of interest that Baytex Energy will be pursuing in
1998 include:
Gold Creek, Alberta - Located in the Deep Basin area of western
Alberta, Baytex Energy has accumulated 54 sections of land in this
multi-zone, hydrocarbon potential area. This land was originally
picked up for a natural gas exploration play in the Bluesky sands of
Lower Cretaceous age. Three wells have now been drilled into this play
this winter and a fourth well is currently drilling. Typically the
Bluesky sand offers 5 bcf in natural gas reserves per section and
individual wells provide between 1.5 and 2.0 mmcf/d of deliverability,
along with 30 bbls of liquids per 1 mmcf/d. In total, Baytex Energy
plans 17 wells for this area in 1998, a number of which will be
drilled in the first quarter. In addition to the Bluesky sand play,
there is also a shallower Falher sand bar and channel play in the area
that has provided substantial gas reserves. The Company has identified
ten of these plays in this area, one of which will be drilled in the
first quarter. Baytex Energy is working on a 100-section farm-in in
this area and it is also looking at acquiring other assets that may be
for sale.
Red Earth, northern Alberta - Baytex Energy continues to develop the
Red Earth Granite Wash "UU" oil pool found by Dorset Exploration in
1996. This pool has now been credited with eight million barrels of
recoverable reserves of light crude oil. Recent 3-D seismic shot on
the northwestern end of the field has indicated a minimum of ten more
locations to drill to extend this field. This drilling will be carried
out in 1998. In addition to the Granite Wash oil pool, there is also
an upper Slave Point reef oil pool that has been found on this
property. Typically of low permeability, Baytex Energy is looking at
developing this formation with horizontal wells and a waterflood. One
horizontal well has been drilled on the property that is producing
around 150 b/d. In total, the Company sees 80 horizontal locations on
its lands, to be drilled in a pattern of four wells per section in
combination with two vertical water injection wells. This Slave Point
reef play can develop major new oil production and reserves for Baytex
in the future. In addition, the Company has made two further Granite
Wash oil discoveries in this area this winter. In total, five Granite
Wash exploratory wells are going to be drilled.
Joan, northern Alberta - Also located in the Red Earth area of
northern Alberta, Baytex will be drilling 25 wells this winter to
maintain and add to gas deliverabilty from this area.
Bon Accord, central Alberta - In this area Baytex has 127 sections.
The Company sees substantial crude oil potential in the low
permeability Viking sands on these lands, which it suggests contain
308 million barrels of oil in place. Generally the rock within the
Viking formation has been damaged badly by traditional drilling
techniques. However, Baytex sees this rock as being very similar to
that which it has successfully developed at Westerose. By using the
same drilling techniques as employed at Westerose, Baytex is hopeful
of successfully developing the Viking formation through horizontal
wells. The first three of these will be drilled in February.
Alder Flats, west central Alberta - This area has gas potential in
both the Ostracod and Rock Creek formations. Currently Baytex has 11.5
mmcf/d of gas deliverability shut-in on this property, as well as 500
b/d of associated liquids production. The Company will be expanding an
existing small solution gas plant in the area to 16 mmcf/d from 2
mmcf/d currently and it has reserved 12 mmcf/d of this capacity for
itself. This gas will be coming on-stream later this year.
Provost, east central Alberta - In this area Baytex Energy has 42
sections. In the Alliance area, a 120 b/d oil discovery was made via
a horizontal well. The Company (100%) has potentially 14 more
locations to drill in this field to recover between 2-3 million
barrels of oil.
Crossfield, south central Alberta - Baytex has identified two Elkton
anomalies in the Crossfield area that it intends to drill this summer.
One of these covers two sections, so it could provide significant new
reserves and production if gas is present.
Ferrier, west central Alberta - Baytex Energy has had drilling
encouragement in both the Ostracod and Second White Specks formations
in this area and it has a number of offset locations to drill this
summer.
Minehead, west central Alberta - Baytex Energy will mount an
exploratory drilling program this fall in search of gas in the Cardium
and Belly River formations, as well as in Bluesky channels.
As you can see, Baytex Energy has a number of interesting exploration
and development plays that it is pursuing in 1998. The Company is in
reasonable financial shape to fund this program. Net debt at the end
of 1997 was $100 million, equivalent to less than 0.9 times our 1998
cash flow estimate of $113.7 million.
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