Despite posting strong second-quarter results at the start of the month, shares in Baytex (TSX: BTE)(NYSE: BTE) finished August 16% lower than where they started.
So, what exactly went wrong?
Canadian benchmark oil prices fared better in the second quarter relative to their U.S. counterparts, as the market has been able to stabilize (for now) following a rocky start to the year that was blamed on a lack of pipeline capacity to transport Canadian exports south of the border.
But despite stronger oil prices that helped to boost the cash flows of producers in the second quarter, most remain cautious (putting it mildly) about what the second half of 2019 may bring, and that’s unfortunately put a bit of a dampening on business investment and overall investor sentiment towards Canada’s energy sector.
Keeping with Baytex as a prime example of the outlook currently facing many of Canada’s energy producers, in the second quarter the company flat out delivered, generating record levels of free cash flow through the first half of the year and exceeding the high end of its production guidance.
Yet because energy prices remain at a mere fraction of where they were just a few years ago, highly levered companies like Baytex are still in survival mode.
Instead of using a strong quarter to boost forward production capabilities, BTE says it plans to use the cash to pay down its US$150 million of 6.75% senior unsecured notes during the third quarter, as it continues to rationalize its balance sheet and financial obligations.
But while that, in all likelihood, will prove to be a wise strategy in terms of its long-term viability, it comes at a cost.
Despite posting record cash flows through the first half of 2019, its management announced as part of its second-quarter earnings release that the company is now lowering its allocated budget for exploration and development capital expenditures by $25 million against both the top end and bottom end of its previously released corporate guidance.
That’s not exactly an encouraging sign for long-term shareholders, without question.
Foolish bottom line
Baytex is undoubtedly one of the riskiest and most levered oil plays in the Canadian market (at least for a company of its size), so will there be other opportunities to get in and out of this stock and make some money?
Most likely.
But for serious long-term shareholders, this is a story that has been going on for quite some time now, and based off August’s earnings release, we still don’t have any convincing evidence that the current narrative is about to change anytime soon.
With markets continuing to exhibit volatility, nervousness, and trepidation thanks to a still mostly uncertain six-month economic outlook, there are better ways for investors to gain exposure to Canada’s energy markets.
Suncor Energy and Cenovus Energy, for example, would be two companies that should enjoy more insulation from volatile swings in energy prices thanks to their size and integrated upstream-downstream business models.
