$50 Oil Breathes New Life into Baytex Energy Corp.

Improving oil has enabled Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to restart most of its idled wells.

| More on:
The Motley Fool

Crashing crude prices earlier this year forced Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to take a hard look at its operations. In doing so, it concluded that not only was it no longer profitable to drill in two of its three core plays, but that a vast swath of its legacy wells were just no longer economical. Baytex shut down some of its drilling rigs and shut in a substantial portion of its production.

However, with oil rebounding back to $50 a barrel, the company has been able to restart the bulk of the legacy wells it shut down earlier this year, which will provide a big boost to its production and cash flow.

Turning the pumps back on

During the first quarter, Baytex proactively shut in roughly 7,500 barrels of oil equivalent per day (BOE/d) of low-margin–and in some cases, negative–oil production after crude crashed below $30 a barrel. That was a significant cut equating to 9% of its average daily output in 2015.

However, with the oil price recovering, Baytex has significantly improved the margins that it can earn on this production. Because of that the company has restarted many of these pumps over the past month; Reuters reported last week that the company has now restarted 95% of the wells it idled earlier this year.

That’s a big deal for the company because it provides an immediate boost to its production.

It likely means that the company will exceed its 2016 production guidance range of 68,000-72,000 BOE/d given that it didn’t expect this production to be brought back online until mid-year. Further, its cash flow for the year will also likely be much higher than initially anticipated, not only because the company will earn more on the production it was already anticipating for the full year, but it will now benefit from the incremental cash flow from the wells it recently brought back online.

Not ready to restart drilling … yet

Despite that stronger-than-expected cash flow, Baytex currently plans to stick with its budgeted $225-265 million in capex for 2016. However, with crude close to $50 a barrel, it does put Baytex’s heavy oil plays back above breakeven; its Lloydminster play needs $43 oil to break even, while Peace River requires oil above $46 a barrel to be economic. Because of that the company now has the option to make another revision to its drilling plans for 2016.

Initially, the plan was to drill 12 wells in Peace River and two dozen more at Lloydminster. However, in March the company revised its plan for the year and decided to forgo drilling those wells in addition to some in the Eagle Ford shale to save it between $100 million and $135 million in capex. In doing so, the company expected to be able to match its capex with its expected cash flows at a much lower oil price.

However, with its cash flow now expected to be higher, the company could choose to reinvest some of it into additional wells to boost its production. Not only could it choose to restart its heavy oil drilling in Canada, but it could reaccelerate drilling in the Eagle Ford shale.

Investor takeaway

The rebound in the price of crude oil is having a noticeable impact on Baytex. Not only has it been able to restart most of the wells it had shut down earlier this year, but it could potentially generate excess cash flow. That cash flow gives it the option to pump more money into its capex budget, which could enable it to drill more wells this year than planned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »