Higher Oil Means Baytex Energy Corp. Is Poised to Soar

Cash in on firmer oil prices by investing in Baytex Energy Corp. (TSX:BTE)(NYSE:BTE).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Beaten-down upstream oil and gas producer Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) has finally taken off, soaring by over 25% since the start of 2018 compared to the 15% gain made by West Texas Intermediate (WTI). There is every sign that the driller has further to gain over the course of the year, particularly if oil remains firm for a sustained period.

Now what?

Baytex entered the oil slump in late 2014 heavily indebted with an almost unmanageable debt burden on its balance sheet. The debt arose from its transformative acquisition of Aurora Oil & Gas Ltd. for $2.6 billion at the height of the shale oil boom. While that weighed on its price, and the deal attracted considerable criticism, especially as the prolonged slump in crude deepened, it has also been the driller’s saving grace.

By completing the Aurora purchase, Baytex acquired considerable acreage in what is considered to be the sweet spot of the Eagle Ford Shale. That acreage is the most productive and profitable of Baytex’s assets. It has low breakeven costs, which, for 2017, were estimated to be US$30 per barrel, and the sweet light crude that it produces trades at close to the spot price for WTI, unlike Baytex’s Canadian heavy oil crude production, which is sold at a steep discount.

Since the prolonged slump in oil prices began, Baytex has sensibly focused its limited capital expenditures on that acreage, driving higher production; at 37,000 barrels daily for the fourth quarter 2017, production was 12% higher compared to a year earlier. The total output from the Eagle Ford represents 29% of Baytex’s 2017 production.

Production is expected to keep growing, because Baytex has boosted its 2018 exploration and development spending by up to 15% to $375 million with 55% of that funding to be directed to developing its Eagle Ford assets. This, along with higher oil prices, will give Baytex’s 2018 earnings a healthy bump.

In fact, the driller projected that it is free cash flow positive when WTI is greater than US$55 per barrel, so with it now trading at close to US$70 a barrel, Baytex’s free cash flow will grow exponentially. This will give it significantly more capital that can be directed to exploration and development as well as paying down debt.

Because Baytex has made significant inroads into that debt and restructured much of it, creating a well-laddered repayment profile, there are no material payments due until 2021, giving the company plenty of time to benefit from higher oil.

What makes Baytex particularly attractive is that it has considerable oil reserves, totaling 165 million barrels at the end of 2017. These were valued to be worth $3.5 billion after tax and the application of a 10% discount rate in accordance with industry methodology, assuming a forecast price for WTI of US$55 a barrel in 2018 and US$65 for 2019. Those assumed prices are lower than the market price for WTI, which was US$66 at the time of writing. That means those reserves will increase in value should WTI remain at over US$65 per barrel for a sustained period.

Nonetheless, using the values currently available, Baytex’s oil reserves have a net present value (NPV) of $14.98 per share, which is almost five times Baytex’s market price and indicates just how much upside is available should higher oil remain in play for a sustained period. 

So what?

Baytex is one of the best levered plays available for investors looking for exposure to higher crude. Its high degree of debt and growing production allow it to maximize that leverage, while its high-quality Eagle Ford acreage coupled with a well-laddered debt profile and large volume of oil reserves increase its attractiveness.

Should you invest $1,000 in Enbridge right now?

Before you buy stock in Enbridge, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Enbridge wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

golden sunset in crude oil refinery with pipeline system
Energy Stocks

Is Enbridge Stock (TSX:ENB) a Buy for its 5.9% Dividend Yield?

This solid dividend payer has the potential to help investors generate reliable passive income for decades.

Read more »

nugget gold
Dividend Stocks

Recession Stocks Are Back: Consider Buying the Dip This April

Recession stocks are back, and this one could be a solid winner.

Read more »

Person holds banknotes of Canadian dollars
Energy Stocks

Best Stock to Buy Right Now: Suncor vs Cenovus?

Suncor stock's 4.2% dividend yield vs Cenovus Energy's growth potential: Tariff-proof safety or growth gamble?

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Earn $500/Month in Tax-Free Income With Your TFSA

Canadians can earn $500 or a desired tax-free income every month by saving and investing through the TFSA.

Read more »

how to save money
Energy Stocks

1 Canadian Stock Ready to Surge in 2025 and Beyond

This Canadian stock has seen significant growth, but more could come for 2025 and beyond.

Read more »

oil and natural gas
Energy Stocks

Here’s How Many Shares of Enbridge You Should Own to Get $2,000 in Yearly Dividends

Solid dividend stocks like Enbridge could help you generate reliable passive income for decades.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

3 Canadian Oil and Gas Stocks to Watch for in 2025

Oil companies like Suncor Energy (TSX:SU) are doing well this year.

Read more »

Aerial view of a wind farm
Energy Stocks

The Best Renewable Energy Stocks to Buy Before They Take Off

Here are two of the best Canadian renewable energy stocks you can buy today and hold for the long term…

Read more »