With oil prices plunging to start the year, Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) knew it needed to make some critical moves to survive. The company sprang into action, announcing several initiatives aimed at keeping it afloat. However, of all the changes, three stood out above the rest.
1: Turning off unprofitable wells
The plunge in oil prices hit Canadian crude harder than most other varieties because of the country’s lack of pipeline capacity. As a result, its price collapsed to the degree that heavy oil producers like Baytex Energy were losing money on legacy oil wells. That led Baytex Energy to proactively shut in about 7,500 barrels per day of low- or negative-margin heavy oil production in the first quarter, which was equivalent to roughly 9% of its production the prior quarter.
Doing so enabled the company to generate higher netbacks on the rest of its production, keeping its funds flow in the black during the first quarter. Meanwhile, when prices improved in the second quarter, the company was able to turn the bulk of these wells back on, providing a boost to production and funds flow.
2: Proactively addressing its credit facility
In March Baytex Energy announced that it had amended its bank credit facility to increase its financial flexibility. The company agreed to a reduction in the borrowing base under that facility to US$575 million (or approximately CAD$750 million), which was down from a previous base of CAD$800 million and US$200 million.
In return, it received a significant restructuring of the facility’s financial covenants, which provided it some more breathing room in 2016 and beyond. Further, the revised agreement would save the company about $8 million this year in lower interest expenses and standby fees.
By addressing its credit facility before it became a problem, Baytex Energy was able to lock up ample liquidity for the foreseeable future. Further, it eliminated any concerns that would breach its debt covenants during the downturn.
3: Cutting capex spending
Baytex Energy was also very proactive with its capex budget this year. It initially planned to spend $325 million to $400 million. However, it cut that by 33% in March to a range of $225-265 million to maintain strong liquidity this year. Doing so enabled the company to generate $39 million in excess cash flow during the second quarter, which it used to pay down debt.
The company cut its spending outlook again in late July down to a range of $200-225 million. While that will have a 1% impact on production, it will help the company generate more excess cash flow to push down debt even further. That addition financial flexibility would also give the company the capacity to ramp up spending later this year or early next year if commodity prices improve.
Baytex Energy made several smart moves earlier this year to stabilize its business in what was a brutal commodity-price environment. As a result, the company is in a relatively stable position for the balance of the year. Further, its improving financial picture puts it in a solid position to ramp up activities in the future after oil improves into the mid-$50s.