(Idea) Baytex Energy - Leaning Bearish Despite A Strong Second Quarter
Note: Dollar values in this article refer to Canadian dollars unless otherwise specified.
Baytex Energy (BTE:CA) is arguably the most controversial battleground stock among Canadian E&Ps.
Bulls believe the shares are worth much more than their current market price due to the company’s massive cash flow torque to oil prices and the rapid pace at which it can reduce debt, repurchase shares, and pay dividends at higher oil prices.
Bears, meanwhile, believe the company’s inability to reduce debt, short reserve life, and low net asset value per share present headwinds to long-term share price appreciation.
Both BTE bulls and bears make valid points.
For our part, however, we believe that the shares offer too much risk and too little reward at their current price. We recommend that investors remain on the sidelines until the shares trade at a lower price and the company demonstrates success in reducing debt and repurchasing at least 10% of its outstanding shares each year.
Q2 Results Beat Expectations
BTE’s second-quarter results were surprisingly strong, as the company beat analyst consensus expectations on both the operating and financial fronts.
Operating performance was overwhelmingly positive. Production increased by 2% from the previous quarter to 154,192 boe/d, above management’s full-year guidance of 153,000 boe/d. Production per share increased by 23% from the year-ago quarter, though liquids fell to an 85% weighting, 1% lower than the year-ago quarter.
Drilling results were a particular bright spot. The company drilled some of its best-performing wells in the Eagle Ford. The top three wells generated 1,348 boe/d of production with a 94% liquids weighting.
In the Duvernay, BTE’s three-well pad produced an average of 1,350 boe/d with a 90% liquids weighting, one of the basin’s top producers during the quarter. BTE continues to ramp its Duvernay production, which management expects to grow to 20,000 boe/d over the next few years.
Production in the Peavine region of the Clearwater averaged 19,938 boe/d—up 13% from the first quarter—with a 100% oil weighting. However, management poured some cold water on the result by reiterating its former guidance of long-term Clearwater production in the 14,000 to 15,000 boe/d range.
These results demonstrate the high quality of BTE’s acreage, as well as management’s success in drilling wells with top-quartile productivity.