Baytex Energy for Upside
One feature of the market for upstream energy firms is that mispricing is fairly common. Exploiting that has made me a lot of money over the past five years.
Of course, mispricing is a tricky thing. Even leaving aside the big dip in early 2020, the oil price has ranged from say $40/bbl to $120/bbl in recent years.
All those firms are making boatloads of money above $100. But some of them are losing boatloads of money at $40.
For my income positions I prefer the big, low-cost producers who emphasize dividends, like Canadian Natural Resources (CNQ) and Tourmaline (TOU). But as usual, the upside opportunities tend to be bigger and more frequent amongst the little guys.
I rely on Michael Boyd and his community at his Energy Investing Authority on Seeking Alpha for information and discussions that helps me find investments in this area. Michael provides value estimates based on current futures strips and his discounted cash flow models.
If I did more upstream investing, I would also join the Daily Drilling Report by Fluidsdoc. So far I’m too cheap. But if this Substack thing takes off, who knows?
A few months ago I established a small (2%) position in Baytex Energy (BTE). Here I will share why and also update my analysis.
[Note on abbreviations: bbl = barrel; boe = barrel of energy, the oil equivalent of the energy content of all hydrocarbons produced; liquids are oil plus natural gas liquids (NGLs). Also all oil prices are in US$ and all other prices are in CAD$.]
Geography and Production
Some producers concentrate in one geographic region. Some, even small ones, span the globe. Baytex is in between.
To the northwest, Baytex has light-oil assets in Alberta and Saskatchewan. They have 142 net sections in the Pembina Duvernay and 344 net sections in Viking. (These total 311k acres and are running 17k boe/d.)
They also have heavy-oil assets in those two provinces. They can access 604 net sections in Peace River and Peavine and 516 net sections in Lloydminster. Extensions to those areas are discussed below. (These total 717k acres and are running 40k boe/d.)
Some of those Canadian assets involve sustaining good relations with first nations. This limits the rate of development, which of course also extends the runway.
To the southeast, Baytex has 269k gross acres. Most of these were added by their acquisition of Ranger Oil in 2023.
The southeast assets are projected to produce 92k boe/d during 2024. This puts total production near 150k boe/d, a very typical number for a small but solid producer.
The overall liquids fraction (“liquids cut”) of the Baytex production is 84%. Since natural gas is worth several times less per boe than the liquids, we will just ignore its contribution to earnings.
Inventory
An absolutely essential question for hydrocarbon producers is what resources they have beyond their proved and probable (2P) reserves. Baytex is doing about 250 net wells per year and has 3,000 identified drilling locations, which would be 12 years.
That 12 years is good by comparison with many US producers, but to retain value even 5 years from now they need to keep adding new drilling locations. A few hydrocarbon producers own a vast inventory of resources that have not been explored in enough detail to be probable reserves but clearly will be. Think Tourmaline (TOU) and Canadian Natural (CNQ).
Others, such as Chord Energy (CHRD) in the US, will clearly need to keep acquiring new reserves to sustain production. Recently Baytex has been steadily adding land in Canada. On the Q2 2023 earnings call, CEO Eric Greager spoke to their recent discoveries [cold flow heavy conventional] on some of their land (quotes edited for length and clarity throughout):
we've got a lot of land and a lot to discover -- it's very exciting to see 2 discoveries in a single year. And because in most of these cases, we have already ownership of the rights to the land -- we have teams in place. We have locations and infrastructure. And so the ability for this to be material depends on the size of the discovery, but each one of these is highly accretive based on the very, very low cost of entry.
And on the Q1 2024 earnings call he discussed the 31 net sections added just south of their assets in the Pembina Duvernay:
We're actually very excited about the quality of the resource associated with these almost 31 net sections we've added. There was substantially more acreage posted in the Crown auction than what we bought. So, we were very surgical and intentional about going after the acreage that we wanted. We got all of the acreage we wanted and we're really excited about the quality of the resource associated with it.
Across 2023 they added at least 115k acres. This is roughly what they need to compensate for production.
But what may be more important is how just plain excited Eric Greagor is about finding new oil. You don’t get the content-free, self-praising adjectives that so many CEOs rain on you.
Instead, you get the straightforward technical story with great nuance. And the technical detail brings you the excitement, as in this from the Q2 2023 call:
So I'm immensely proud of making something meaningful. Again, hundreds of millions of dollars of value accretion, effectively materializing out of the just the intellectual property and time it takes to run an exploration program. … This is the third discovery in 3 years. 2 years ago, it was the Peavine and then 2 more this year. So 3 discoveries in 3 years in cold flow heavy. We sit on a very large acreage position, 1.7 million net acres. And because oil is where oil was, we're going to continue to create a steady diet of these meaningful value accretive opportunities.
So often it seems like what you are hearing on the earnings calls is either the PR department or the finance department. On the Baytex calls you get the pleasure of hearing from a CEO who is clearly a real oil man, even if he no longer has dirt under his fingernails.
Next we get into the details that impact valuation.