Oil was never going to stay at $30 per barrel. It would have destabilized the Canadian and U.S. economies including the broader financial markets and, quite simply, would have bankrupted up to 90%, or more, of North American oil stocks. Take a look at the below chart which highlights the breakeven costs of global oil producers, provided by ZeroHedge:
As you can see, $30 oil was simply not feasible in the vast majority of North America. Now, after a 2015 that saw the worst nightmare for oil investors come true, oil is stabilizing and Canadian oil stocks are rising. With the narrative for oil prices changing as OPEC and others consider holding production in an attempt to boost prices, opportunity is ripe in Canada and U.S. oil sector for companies that had been written off as recent as last month.
According to Baker Hughes’ summary count from last week, active drill rigs in the U.S. fell to 489 – the lowest since 1948 (after the War) when there were just 488 rigs drilling around the country.
source: http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview
With this week’s report due out Friday, expect the number to drop even further as companies will not have had time, or perhaps the confidence or cash, to begin drilling new wells. This absolute collapse in exploration and expansion in the oil sector has finally had an impact on the price of oil – which is up 40% from lows in the mid-20s earlier this year.
Baytex Energy: a Canadian oil stock on the move
Baytex Energy has been dominating headlines of late and it’s important to understand why. While oil is up about 40% from its low, Baytex, despite today’s 12% selloff, is still up nearly 150% from its recent low. Leverage to oil reserves provides the same leverage as any gold or commodity-based company. This leverage is really only important if the company has the capital to ride out the tough times… And, it’s the reason investors buy individual stocks. When the price of commodities reverse, investors can gain exposure to that leverage and instead of getting 50 cents or 2% on the price of oil can get 50 cents on 10 million barrels (towards valuation) which usually results in a more significant move in the said oil stock. Very basic, but true. Where the risk comes in, is by selecting the right stocks.
Baytex Energy: debt woes and higher oil prices
Much has been said about Baytex‘s debt which saw the company end 2015 with a net-debt-to-cash flow of 4.
According to CapitalCube.com, a predictive analysis financial platform that utilizes big data, Baytex’s price to book multiple sat at just 0.46 compared to its peer median of 1.20. Below are some further valuation highlights:
“BTE-CA’s EBITDA-based price multiple implies slower growth than its peers. The market also seems to expect the company’s currently median rates of EBITDA-based return to decline.
BTE-CA’s relative asset efficiency and net profit margins are both around the median level.”
source: Capital Cube’s closing data from March 7th 2016.
To look at Baytex Energy’s fundamental analysis through the lens of CapitalCube.com click below: More Analysis on BTE
In other words, everything is dependent on the price of oil for mid-tier Canadian producers.
Sprott’s Eric Nuttall recently listed Baytex as one his top energy picks for 2016.
source: http://www.bnn.ca/News/2016/2/10/6-stocks-to-buy-while-the-oil-glut-disappears.aspx
While many analysts and forecasters talk up their own book, Baytex is to be viewed as an example and its situation applied to other Canadian oil stocks.
In a Motley Fool article titled Why Baytex Energy Corp. Could Easily Be 2016’s Top-Performing Oil Stock, Adam Mancini explains how Baytex’s current debt ratio could be overcome:
“First, Baytex currently has a healthy amount of liquidity. The company has credit facilities consisting of a US$200 million credit line and a $800 million credit line. This gives Baytex around $1.078 billion of available liquidity. As of December 31, 2015, Baytex had only drawn about $256 million from its credit facility, leaving it with $820 million of available room remaining.”
source: http://www.fool.ca/2016/03/07/why-baytex-energy-corp-could-easily-be-2016s-top-performing-oil-stock/
All of these scenarios with not just Baytex, but so many Canadian oil stocks, are dependent upon a stabilizing and rising price of oil. Almost every oil company has debt, varying working expenses and all-in production costs.
If oil falters and drops back below $35 and stays there it will derail the economy. The more likely outcome is a steady rise in price to the mid-$40s at which point many of the top tier low cost producers will once again be profitable. This could make oil stocks such as Baytex not only feasible, but profitable in the coming quarters.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
