An Oil Stock Worth Investing Into: Baytex Energy Corp (TSE: BTE)
Baytex Energy Corp. (TSX: BTE), is a North American focused oil and gas company which is engaged in the acquisition, development and production of crude oil and natural gas in the Western Canadian Sedimentary Basin and in the Eagle Ford in the United States.
Key highlights
- Reaffirmed guidance for FY2020: The company reaffirmed its production guidance to 80,000 boe/day from its earlier direction of 78,000 – 82,000 boe/day. The group reduced its FY2020 operating expense guidance by 7% to CAD 11.20 to CAD 11.40.
- Reduced net debt and generated Free Cash Flows: The company managed to reduce its net debt by CAD 89 million during the third quarter through a combination of free cash flow and got support from the strengthening of the Canadian dollar relative to the U.S. dollar. The company generated free cash flow of CAD 60 million in Q3 2020, and cumulative of CAD 787 million since FY16 till date through Eagle Ford. Furthermore, improved drilling activities are likely to support the company’s free cash flow levels.
Financial Overview of Q3 2020 (In CAD thousands)
- In Q3 2020, the company’s reported total revenues decreased by 39% to CAD 212.48 million, as compared to CAD 349.58 million in the previous corresponding period(pcp). The decline was primarily due to lower income from petroleum and natural gas sales from both operating regions of North America.
- The company posted net loss before income tax of CAD 22.42 million as against a profit of CAD 16.7 million in pcp.
- Net loss reported by the company in Q3 2020 stood at CAD 23.44 million against a profit of CAD 15.15 million in pop. Primarily on the back of low revenues due to low weighted average sales price which stood at CAD 33.79/boe for Q3 2020 against CAD 47.14/boe in Q3/2019.
Risks associated with investment
As the company is in exploration business of oil and gas, hence their revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact their financial performance include low demand for oil and gas, and financial risk on behalf of its hedged positions.
| Price to Cash Flow Based Valuation | |
| NTM Price/Cash Flow Value (approx.) | 1.7 |
| Cash Flow Per Share FY21 (CAD) | 0.6 |
| Target Price (CAD) | 1.75 |
| CMP (CAD) (11th Jan 2021) | 0.81 |
| Recommendation | Strong Buy |
Stock Recommendation
Global crude oil prices have begun to recover and were relatively stable during Q3 2020, as members of OPEC agreed to production curtailments and governments also eased some restrictions that allowed economies to begin reopening, which increased demand. The company also reaffirmed its FY2020 guidance, which is encouraging. On the valuation front, the stock trades at a significantly lower price to cash flow multiple of 1.3x on Next Twelve Months (NTM) basis, compared to the industry (Oil & Gas) mean of 4.3x. Hence considering the facts mentioned above and rationales, we recommend a “Strong Buy” rating on the stock at the closing price of CAD 0.81 on January 12, 2021
