Baytex Energy Stock: High Speed ​​Debt Repayment (OTCMKTS: BTEGF)

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(Note: Baytex Energy is a Canadian company that reports in Canadian dollars).

Baytex Energy (OTCPK: BTEGF) (BTE: TSX) has launched a debt repayment program that many say will take years. But high commodity prices have sped up the process of paying down debt far beyond what many thought possible a year ago. So while it looks like the debt has yet to come down, it looks like the market is finally seeing the end of the debt reduction program in the future. The outlook for common stock prices is starting to improve.

Baytex Energy Third quarter 2021

Source: Baytex Energy Third quarter 2021, earnings press release.

Adjusted fund flows more than doubled from the previous year. This accelerated the debt repayment plans. The result is that the debt is much lower than what was currently expected. Management’s objective is a long-term debt / EBITDAX ratio of around 1.5. It seems like a goal very close at hand in a time frame that was never foreseen when the goal was set.

So what is going to happen now is that debt reduction will gradually lose its importance as this goal is met while other possibilities like a dividend or share buybacks will go on. slowly go up in priority. These kinds of shareholder return opportunities will thrill Mr. Market.

In addition, management has a game-changing development that will likely result in more production using less capital than expected.

Northwest Clearwater - Promising first results with a solid economy

Source: Baytex Energy December 2021, Investor Presentation.

This discovery has a break-even point nearly US $ 10 below the break-even point of the primary heavy oil business this company started with. Any drilling here has a faster return on investment due to the higher profitability. Additionally, this discovery (even if it is heavy oil) can generate cash flow at commodity prices significantly lower than historical production. This discovery will result in a significant reduction in the company’s break-even point as production becomes important to the company.

The last two wells actually advance initial production rates. This could further reduce the future payback period if these results can be reliably reproduced. Thus, the possibility of an even higher profitability in the currently favorable environment of commodity prices is a good possibility.

Such a profitable discovery will allow the company to increase its cash flow from a higher cost development to this discovery. Then production does not need to increase for cash flow to increase and profits to improve. This discovery has the potential to become the bulk of the company’s cash flow in Canada for the heavy oil division.

When management announced budget for fiscal year 2022 and focused on free cash flow, it is expected that this discovery will have an increasingly large share of the company’s future free cash flow.

Management has reached an agreement (or more) to lease more acreage so that production from this new area will be important to the company in the future. Interestingly, the numbers are excellent considering that heavy oil has traditionally been sold at a discount to the benchmark WTI. Thus, production must be all the more efficient to include the discount while keeping the breakeven point low.

Baytex Energy's Technical Advances Drive Productivity Improvements

Source: Baytex Energy December 2021, Investor Presentation.

This project is possibly the next most important for investors of operating properties in Canada. The breakeven point is relatively high for a light oil project. But the advantage of light oil is that management doesn’t have to worry about a potentially increasing discount from WTI when prices get low. Thus, this project will generally generate better cash flow during downturns than heavy oil with the same equilibrium price.

This equilibrium price includes price assumptions. But often discounted products suffer worse price drops than expected and turn negative for cash flow when a slide doesn’t say they should.

Management has been working on increasing reserves and initial flow rates with the wells as noted above. So far, this progress has not been sufficient to reduce the breakeven point noted above.

Eagle Ford: Strong Free Cash Flow and Deep Drill Inventory

Source: Baytex Energy December 2021, Investor Presentation.

The Eagle Ford is not only important for low breakeven point and cash flow. This activity also supported the issuance of debt denominated in US dollars. While financial results often show that debt values ​​fluctuate with exchange rates, actual activity likely has no fluctuation as the cash flow from that location in the United States is likely supporting the issued debt.

Management repaid the debt of the United States during this period of high prices. It would make a lot of sense financially, because Canadian debt is worth less than US debt. If this strategy continues, a strong US dollar will eventually be able to repay Canadian debt at a lower cost. This should benefit shareholders in the long run.

Heavy oil has a sharper profit path and is often more profitable in times of very high commodity prices. The most reliable cash flow, however, comes from the Eagle Ford. So, when prices are low during a cyclical downturn, the Eagle Ford has been the primary source and sometimes the only source of downward cash flow in an industrial cycle.

The significance of the discovery of low break-even heavy oil is that the discovery adds another potentially important source of cash flow when commodity prices are low. This would provide an important safety cushion, as many heavy oil producers suffer from unusually low cash flow near industry lows.

Pembina Area Duvernay Light Oil: the game of emerging resources

Source: Baytex Energy December 2021, Investor Presentation.

The last major consideration must be this discovery of light oil. The initial production rate finally becomes competitive. Well costs are still far too high, at C $ 7 million. We must therefore work on it to align the costs of the wells. It will likely take a few more years to experiment with well designs and completion techniques before this discovery can be developed commercially.

In the meantime, there is the promise of another light oil game to help the company weather industry downturns.

The future

Now that cash flow is in the range of C $ 200 million while long-term debt has declined to around C $ 1.5 billion, the magic debt ratio is now below 2. C ‘ is important to Mr. Market and explains part of recent common stocks. price force.

Management will likely reduce debt to a much lower level, as ratios tend to rise significantly when commodity prices weaken. Yet this company is way ahead of many competitors when it comes to debt reduction.

Thus, for the first time in a long time, dividend potential and share buybacks are possible in the future. Debt reduction will continue, but smaller and smaller amounts will likely be allocated to this goal once long-term debt approaches the C $ 1 billion mark.

There are some really good potential projects that promise to increase cash flow and profitability without the need to increase production. Thus, the company could show good financial progress even if the production growth will not be possible for a few years, unless technological advances allow it. In the long run, such technological advancements are more likely to result in a lower capital budget the following year.

This stock has come a very long way. Today there are very good possibilities for the future, regardless of the development of commodity prices.

Tana T. Thorsen