Baytex Energy Corp (BTE.TO)

Recently started to show up on his radar. Got hit with the rest of natural gas stocks but it’s been around for a long time and very well managed. They own other stocks in this sector but would consider this one.

This is an oily stock, and has a history of moving higher from approximately late January through until May/June of each year. Chart shows the stock has been drifting lower since the beginning of the year. His preference would be into one of the gassy stocks.

He would avoid this. They will really shine in a higher commodity price, because they will be able to generate cash flow above and beyond their interest payment, to deploy into the ground and grow. Trading at a premium multiple, 6.6X versus the average of 6.2 of the intermediates in Canada.

Has been in the hurricane in Eagle Ford, have a huge debt, and with the recent increase in oil, there has been about a 10% pop in the share price. Buy, Sell, Hold or Short? At this point in time, he would not go into this. They have a fairly big debt position. They don’t manage their Eagle Ford operations, but own them with Marathon which is doing all of the operations. Any time oil ramps up, their leverage is going to help them out, but it also goes the other way as well.

A 6.625% bond maturing in 2021. Made a big acquisition in the Eagle Ford of Texas. You are getting nothing for the heavy oil business in Canada. If push came to shove, as the debt holder, he will get the Eagle Ford asset if it is ever restructured.

(Market Call Minute) A challenged balance sheet. Get something with a better balance sheet because you might have to hold it for some time.

There is a lot of misinformation on oil investment. People think oil fields continue to pump oil regardless. This is a diminishing resource, so if you don’t spend the money up front for exploration and well development, production declines. Inventories in the US are declining, and the money hasn’t been spent upfront. Often, it’s 1 or 2 years of money spent to develop the necessary resources, and it actually returns as production. We may be facing a situation where we are more short of oil than we think.

They made an acquisition at the top of the oil market. Any company that makes a bad acquisition at the wrong price, will be carrying the consequence of that. They incurred a lot of debt. The management focus isn’t on getting the productivity out of the fields that they purchased, it is rather how do they unwind the mess they created. If looking for torque and you can stomach the fact that they have debt, this is a name that will get you the torque. If there is a continued down price in oil, this company is going to struggle. There are probably better names to own.

Unsecured debenture 6.625% Due 2022. They were in distress when oil fell apart. They are heavy oil producers and a fracking play in the US. They had too much debt. More US refiners are requesting heavy oil now. The risk reward is in his favour. The bond is trading at a discount.

He is concerned about this company. The balance sheet as of March 31 had $1.8 billion of debt against $1.9 billion of equity. Have some financial derivatives on their books, but they are minuscule. Because of their debt, when the market gets hurt and the value goes down, they have to write down the assets. They’ve taken impairments in the past on assets when the price of oil has been beaten up. Be careful.

He would not own it because he looks for risk adjusted growth opportunities. This has been a damaged story because it is just too highly levered. It is difficult to see oil prices high enough for them to appreciate.

There is absolutely no reason to own this right now. They’ve too much debt, and lack the ability to meaningfully pay it down. This was a result of their entry into the Eagle Ford. When comparing what they look like in terms of growth rate relative to valuation, in Canada the average intermediate oil company is expected to grow next year by about 15%, with an average multiple of 5.2X EV to future cash flow. This company is expected to grow by 1% and is trading at 5.7X.

Sold his position about a month ago. He likes what they are doing. Very good operators. If you are very bullish on crude, this is a really, really torquey name. They have both financial and operating leverage. Very good assets in Canada and Texas. The issue is the debt. It is too levered, and they have to fix it. This needs crude to be $10 higher for them to be positive cash flow.

(A Top Pick May 27/16. Down 52%.) He believed that the market was changing and it looked like the price of oil was going to stay in the $50 area.

He doesn’t own this because of the level of debt, and he doesn’t know how volatile the stock is going to be. However, he owns the bonds which he bought at a discount. With the bonds, whether the company is solvent or insolvent, he is going to get paid back his bonds.