Baytex Energy Corp (BTE.TO)

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.

Energy stocks in general are pretty bombed out. Nobody can drill oil profitably and recycle back enough money to support future growth at $55 oil. Doesn’t think you can look at this one as a stock, you have to look at it as an option. Anything under $60 and this company doesn’t survive. It has debt turned out to 2021. It has some assets that it is not an operator of, that they bought about 5 years ago. The longer oil trades below $60, the deeper this company’s troubles are.

(A Top Pick March 28/17. Up 5%.) 6.625% bonds maturing 2022. A safer way to play the recovery, because the bond was under distress, but are backed by the Eagle Ford assets in Texas, one of the best fracing natural gas plays. Last quarter they came out with really good production numbers, as well as lower costs per well.

6.625% bonds maturing July 19, 2022. He still likes this. Their numbers came out, and they not only had lower cost wells, but their production at the Eaglesford was much better than expected. It is a possible deleveraging story, but even with their stretched balance sheet, they can handle it. He likes the company, management and the execution of what they are doing.

Has a lot of debt, which is the knock against them. But that shouldn’t be as big a concern as it is, because the debt is turned out to 2020 and beyond, but the sentiment around oil/gas and the sector is so negative today it doesn’t matter. Have some great assets in the Eagle Ford in the US with heavy assets in Canada. Not for the faint of heart.

Sell Baytex (BTE-T) and Crescent Point (CPG-T) and move into Teck Resources (TECK.B-T)? Crescent Point and Baytex had high dividends. When oil fell, the dividend strategy collapsed. From this, he learned don’t rely on commodity stocks to pay dividends. Both are down in the dumps, but both are good names. This one probably has a little more debt than he would like, but Crescent Point is really trying to remake itself. If looking for torque in a portfolio, you will probably get more in the near term, from a base metal stock that you would from an oil stock.

From a value perspective, this is a cheap stock. BV is $8.48. It was a $45 stock in 2014, and the low in Q1 was $1.57. What bothers him is that the company had $1.7 billion of debt against $1.9 billion in equity. When you have a reduced price in the commodity and less cash flow is coming in, you need to focus on the debt holders first, so you can’t put money back into the ground. That means your production is not going to grow. Production volumes have come down. In Q1 in 2016 they were 41,000 and in Q4 they were 33,000, so they don’t have enough money in the till coming in from cash flow to service the debt. His view is that this company is going down. He would say there was a 10% risk the company will not survive.

One of the high beta names, because it is predominantly heavy oil, and therefore very subjective to the price of the underlying commodity. Has a highly-leveraged balance sheet. A great performer when the times are right, but he is more conservative and is remaining with lower cost producers and stronger balance sheets, at least until the 4^th quarter when he has better visibility on oil recovery.