In the past 30 days, Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) has staged a highly necessary rebound. After falling over 80% in the past year, shares popped 57% last month, a strong signal that the market believes it can survive the current downturn. With the stock now hovering around $4 a share, is Baytex in the early innings of a massive comeback?
Debt still rules
Despite the recent rally, Baytex shares are still down big since oil prices collapsed. The biggest contributor has been its excess leverage. Today the company has $1.9 billion in debt versus a market cap of only $800 million. After posting big losses in recent quarters, investors were worried about its ability to continue servicing its outsized debt load.
Now that the fear has subsided and the market has stabilized a bit, we can get a much better picture of Baytex’s ability to stay solvent. The biggest factor working in its favour is its debt maturity schedule.
The company doesn’t face any major payments until 2021 and likely will be able to refinance a majority of that debt when the time comes. For immediate financing needs, it still has approximately 75% left of its $1.06 billion revolving credit facility.
While the market panicked when oil first collapsed, it’s getting fairly clear that Baytex can survive as long as prices rebound within the next few years.
Cost reductions are taking hold
Nearly every oil and gas producer has initiated massive cost-reduction plans in the past 12-24 months. Baytex is no exception. In 2015 management found about $135 million in cost efficiencies versus its initial budget. Over half of that stemmed from operating and corporate cost reductions, meaning that the savings will likely be recurring in future years.
Baytex has also been able to reduce its breakeven price of production in its three primary operating regions. As you can see below, Baytex can generate reasonable returns on each project, even at $45 a barrel. While current prices are still below this mark, most analysts expect oil to rebound over the next 12 months as markets rebalance from oversupply. As we demonstrated earlier, Baytex has the financing necessary to wait until this happens.
How high could shares go?
Baytex shares have set the stage for a massive rebound. The necessary financing is in place to keep the company solvent until the oil market rebalances. Once it does, low breakeven prices should allow it to be very profitable with prices over $45 a barrel.
In the first half of 2015, when oil averaged roughly $50 a barrel, shares were at $20. Now that the market can price the company more rationally (given its lower-than-expected bankruptcy risk), the underlying assets should be worth much more than previously anticipated.
If you’re an oil bull, Baytex has plenty of long-term upside.