Baytex Energy Corp. (TSX: BTE) is a $5 billion Canadian oil and gas company. Its assets include crude oil and natural gas assets in the Western Canadian Sedimentary Basin and Eagle Ford in the United States. This is a high-quality, well-diversified portfolio of assets with 12 or more years of drilling inventory.
Oil prices have recently been on an upswing, as has Baytex Energy’s stock price, which is up 47% since June. But is this volatile stock worth buying as we head into a very tumultuous year?
Rising oil prices continue to benefit Baytex
There’s no question that oil prices are volatile. In fact, they’re up 18% this year and they’ve traded in a wide range of between $67 and $92. Yet, Baytex Energy’s stock price is slightly down year to date.
Behind these facts is a company that’s seeing growing cash flows and shareholder returns. This is partly being driven by higher oil prices, which have been rallying on supply cuts from Saudi Arabia and Russia, as well as falling shale output from the U.S. Together, this has created upward pressure for oil prices, despite the concern that exists on the demand side.
In a nutshell, what this means for oil and gas companies like Baytex is strong cash flows. In fact, Baytex’s adjusted funds flow in the first half of 2023 was $510 million, with room to move much higher as oil prices are currently closing in on $100.
Let’s explore the other reason that Baytex Energy stock looks attractive.
Ranger Oil acquisition boosts growth
Baytex’s $3.4 billion acquisition of U.S. oil and gas company Ranger Oil expanded its presence in the Eagle Ford shale resource in Texas, and it adds 67,000 to 70,000 barrels of oil equivalent per day (boe/d) of production to Baytex. Before the acquisition, Baytex’s production was approximately 87,000 boe/d. Thus, we can see how significant this transaction is, as it increases Baytex’s production by almost 30%. In turn, the new Baytex has a better scaled and durable business with a 15% lower free cash flow beak-even point of US$41 per barrel.
Therefore, along with higher oil prices, Baytex will see major accretion from this deal in 2023. For example, it will more than double the company’s EBITDA and almost double its free cash flow. Importantly, management has committed to use 50% of this free cash flow to pay down debt and 50% for shareholder returns.
Naturally, debt financing comes as part of an acquisition like this. While this financing is not cheap, the company will be able to maintain a healthy one times debt to EBITDA ratio at oil prices of as low as $50 per barrel.
Will Baytex profit?
After having looked into Baytex’s financials and its latest acquisition, I’m left with the sense that Baytex is in a really good position. While higher interest rates are increasing Baytex’s interest expense and dampening the demand for oil, supply-side issues remain supportive of oil prices. If this continues, the company will benefit immensely as oil prices approach the $100 mark.
And if not, all we need is for oil prices to stay above $50. In this scenario, Baytex will be in line with its one times debt-to-EBITDA target, which is a healthy place to be. Also, Baytex will grow as a result of the Ranger Oil acquisition, ramping up shareholder returns. Finally, the upside in Baytex Energy stock if oil prices remain strong is quite significant as Baytex has real drilling upside, as well as plans to introduce a quarterly dividend.
