Headwater and Rubellite should trounce Baytex

But all three are good bets on Clearwater

Josh Young of Bison Investments has spilled a lot of ink touting Baytex (BTE.TO) for its leverage to the Clearwater heavy oil play where Baytex has enjoyed some strong drilling results. For good reason, Baytex has about 560 sections of Clearwater exposure and its wells have been dynamite. There is no doubt the Clearwater area is home to some prolific reservoirs and Baytex will be a beneficiary. Many oil & gas analysts are waking up to the potential of Clearwater, often noting the major players in the area which are Headwater (HWX.TO) and Tamarack Valley (TVE.TO) which seem to be ahead of Baytex in developing this highly profitable play.

The knock on Baytex is the company is still burdened with CAD$1.3 billion debt but that is falling fast. Baytex gave a lot of coverage to its Peavine (part of Clearwater) drilling in its Q1 2022 report where it noted that from a standing start last year production in that area had reached 8,000 Boe/day. Impressive by any measure and certainly enough to move the needle on Baytex despite the company’s debt and 569 million share count. With netback of over CAD$50 a barrel, that 8,000 barrels a day coughs up about CAD$150 million of cash flow for debt-laden Baytex and as production grows Peavine will become a more substantial part of Baytex future.

By comparison, debt-free Headwater expects to produce 12,500 Boe/day in 2022 from its Marten Hills (part of Clearwater) production and has a share count of 222 million, less than half of Baytex. With respect to Josh Young, Headwater is a better way to play Clearwater.

But in the wings is a small and relatively new company called Rubellite (RBY.TO). Like Headwater, Rubellite is debt free and focused on the Clearwater opportunity. With 270 sections of prospective land in the area, Rubellite is about half the size of Baytex in Clearwater but about the same as Headwater. Rubellite’s share count is ~56 million.

Rubellite’s Clearwater acreage at Marten Hills and Nipsi may be the most economical play in North America with returns of several hundred percent and paybacks in six months or less. That make it possible for tiny Rubellite to accelerate its drilling program without additional external financing of debt or equity. 2022 production is planned to average 2,200 to 2,400 Boe/day (I model a bit higher) and in my opinion should ~double in 2023 based on a capital program of CAD$30 million in that year.

Projections should be treated with caution given commodity prices volatility, but are useful to assess the size and scale of opportunity nonetheless. I model Rubellite growing to ~8,000 Boe/day in 2025 while building a cash pile of several hundred million, pointing to a share price in the range of CAD$20.00.

That works for me. I hold 45,000 shares and will probably add to that position.