It has been a bloody couple of years for Baytex Energy Corp. (TSX:BTE)(NYSE:BTE). At the end of August 2014 shares were trading at over $40 a share. Oil prices were over $100, and there was serious optimism about the future for both the company and the industry.
Since then, oil prices have plummeted and the stock took a nosedive, hitting a little over $2.35 per share by January 2016. Since then, the stock has experienced some appreciation, but it is still far away from where the company once traded at.
Fortunately, I believe that there might be a really lucrative but quite risky play for investors who have faith that oil prices are going to return to their glory days. And unlike some of the other, more stable companies, Baytex is in a position where the returns can, as Peter Lynch would say, be a multi-bagger. There are a few reasons why I believe this.
Baytex has been shutting down its low-margin wells to move away from unprofitable oil production. In the first quarter, it made the move to shut in (reduce its production) 7,500 barrels of equivalent heavy oil per day. This oil was losing the company money, so Baytex opted to rely on its light oil production instead. Baytex was then able to sell the light oil at far higher margins. According to its September presentation, Baytex said that light oil trades off a Louisiana Light Sweet benchmark, which trades at a premium to WTI.
Baytex has also been getting more efficient with its wells. It has seen a 100% improvement in 30-day IP rates since Q4 2011. Further, the amount of time it takes to drill has decreased by 63% in the same time. This means that its well costs drop, allowing it to earn more money when oil starts flowing.
Another thing to consider is that its breakeven costs for its different wells have put it in a pretty decent position. While its Lloydminster and Peace River wells require WTI to be US$45 and US$46, respectively, its Eagle Ford well only needs US$30 WTI to break even.
The company is also working to reduce its debt, which is important because it has $1.9 billion in debt and only is worth $1.45 billion. It will be quite difficult for the company to truly get aggressive until cash flows increase. However, Baytex made a move to reduce the size of its credit facility in exchange for a restructuring of the financial covenants. This will help save the company $8 million this year.
But there are still risks.
Like I said, debt is a problem. And while its Eagle Ford well is above breakeven costs, Lloydminster and Peace River is still a few dollars shy of breaking even. But the company is making the right moves to reduce its debt and attempt to be operationally lean.
If it can achieve that, and if the price of oil starts to rebound, I expect that Baytex will experience a resurgence. And with shares trading at only $5.30, it might be a good way to see strong returns. With some risk, the rewards could be lucrative.
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Fool contributor Jacob Donnelly has no position in any stocks mentioned.