Can Baytex Energy Corp. Survive?

The future of Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) may be decided by a single metric.

| More on:
The Motley Fool

Last year, when shares were at $7, Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) completely discontinued its monthly dividend, saving the company roughly $240 million a year. With the company losing over $1 billion over the last four quarters, the dividend cut was seen as a last-ditch effort to stem the tide of deteriorating energy prices.

With its stock now down to just $2.50 and the operating environment arguably much worse, can Baytex Energy continue to survive?

Debt may be its downfall

In the last 12 months Baytex has seen its operating cash flow fall from $347 million a quarter to just $168 million today. The company has been able to avoid generating negative free cash flow by slashing capital expenditures by nearly 50%. Still, free cash flow last quarter was just $41 million, which pales in the face of the company’s $1.9 billion debt load. Last year it spent over $100 million in interest expenses alone.

While cutting capital expenditures has allowed the company to conserve cash, it’s having some real effects on the underlying business. In 2015 the company averaged around 86,000 barrels a day of production. In 2016 management is guiding for only 74,000-76,000 barrels a day.

In the race to stay financially solvent, it looks like Baytex is gutting its future. Unfortunately, that may be its only option. Debt levels are now over three times EBITDA, and lenders are becoming increasingly impatient with loss-making producers. The company does have a $1.06 billion credit line, but 25% of it has already been used up.

Baytex management wants investors to look into the future and imagine higher oil prices, but growing losses and mounting debt levels are forcing the company to focus on preserving today.

Today’s oil prices are simply not survivable

Baytex believes that across its three biggest projects, its breakeven oil price is between $35 and $47 a barrel. In fact, the company’s return forecast for each well is based on $50 crude. With oil sticking around $30 a barrel, things need to improve fast. The company does have one trick up its sleeve, however.

For 2016, Baytex looks to have a relatively attractive hedging program, one that might allow it to survive until oil prices improve. Around 40% of its oil production is now hedged through various arrangements. In total, the company should realize selling prices around $10 higher than spot prices. At $50 a barrel, however, the hedges start to wear off. Still, Baytex may have bought itself a lifeline if prices remain under $50.

Unfortunately, by 2017, almost no production is currently hedged. If low prices persist until then, it’s hard to see Baytex surviving in its current state.

A tricky thesis

If oil prices rebound in a meaningful way, Baytex will no doubt have significant upside. The issue with taking a bet is that you need to predict both the direction and timing of oil prices. If you’re right about oil staging a rebound, you may still lose with Baytex if things take an extra year or so to develop. As a debt-ridden company that’s completely unhedged next year, Baytex needs $50+ oil by 2017 to survive.

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 Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

oil and gas pipeline
Energy Stocks

TC Energy Stock Is Starting to Get Ridiculously Oversold

TC Energy (TSX:TRP) stock is one of those deep-value dividend plays for the next decade and beyond.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

3 Top Energy Stocks With High Dividends

Investors looking for big dividends in the energy sector can explore these top energy stocks.

Read more »

Dollar symbol and Canadian flag on keyboard
Energy Stocks

3 Canadian Stocks You Can Confidently Buy Now and Hold Forever

You don’t need to think twice about loading up on these three top stocks.

Read more »

Aerial view of a wind farm
Energy Stocks

Is There Any Hope for Brookfield Renewable Stock?

Brookfield Renewable stock (TSX:BEP.UN) may be going through a rough patch, but recent moves suggest more is yet to come.

Read more »

edit Balloon shaped as a heart
Energy Stocks

If You Like Enbridge Stock, Then You’ll Love These High-Yield Energy Stocks

Do you like Enbridge (TSX:ENB) stock for its dividend but not the share growth? Consider these two top monthly payers…

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Clean Energy Play: Is Brookfield Renewable a Good Stock for a TFSA?

Add this top renewable energy stock to your self-directed TFSA portfolio for significant long-term and tax-free wealth growth.

Read more »

grow dividends
Top TSX Stocks

Enbridge Stock Pays a Massive 7 Percent Dividend and Now is a Great Time to Buy  

Have you considered buying Enbridge stock lately? If not, you may want to buy this long-term gem to start earning…

Read more »

edit Woman calculating figures next to a laptop
Energy Stocks

Better Buy: Cameco Stock or Brookfield Renewable Stock?

If you're looking for a strong future, clean energy is the answer -- especially if you're looking at a strong…

Read more »