Baytex Energy value ignored

Debt will fall away, value will rise to surface

Baytex Energy (BTE) today reported the sale of Plato and Forgan assets in the Viking play for ~CDN$155 million. The sale will close before year end and chip away at the debt the company incurred with its massive Ranger acquisition. Investors have shied away from the company owing to its debt levels and the overhang of share sales by the Ranger shareholders who received Baytex shares and cash in the transaction.

The result is that Baytex shares trade well below fair value. Street analysts (for example, at CIBC Investors’ Edge) place a target price in the CDN$8 range for the stock within a year. I see significantly more price appreciation as likely, depending of course on the level of oil prices. I reproduce my model of Baytex below.

Assuming constant oil prices more or less at today’s levels, a 29% decline rate and capital efficiency of $19,500 per Boe/day, I see the current value of BTE shares north of CDN$6.00 with that value growing to double digit levels in 2024 and 2025 as debt comes down and ultimately as cash builds. I have assumed capital outlays of CDN$700 million in each of 2024 and 2025 with free cash flow applied to debt, ignoring the de minimis dividend Baytex has paid. The dividend (if, as and when paid) is irrelevant to valuation), at least if you accept the “irrelevance” theorem which earned Merton Miller and Franco Modigliani a Nobel prize in economics in 1960 or thereabouts. I have also ignored share repurchases in 2024 and 2025, if any.

Tweaking the company’s balance sheet and share count through dividends and buybacks won’t alter the conclusion. The shares are deeply undervalued and investors who have the courage to buy into the company during an economic slowdown that may see somewhat lower oil prices for a quarter or two should be well rewarded for taking that risk. Or, oil prices will collapse, the economy will enter a deep recession, and those who bought on margin or need their money before any economic recovery will suffer losses. That is the nature of investing in a volatile market.