(IDEA) Baytex Energy
By: Jon Costello, HFIR Energy Income
Baytex Energy (BTE) isn’t an obvious “energy income” investment. It currently pays a $0.09 per share dividend on its stock, which generates a 1.6% yield. That’s’ not even in the ballpark of midstream dividends, which average more than 7%. But BTE’s cash flow generation at current oil prices will allow it to pay multiples of its current dividend.
At the moment, its shares don’t reflect this possibility, so investors seeking income generated from higher oil prices could consider buying them now in anticipation of a higher dividend.
Investment Thesis
In recent weeks, BTE transitioned to paying out 50% of its free cash flow for debt repayment and 50% in a mix of dividends and share repurchases. We estimate that at current oil prices, BTE generates a 30% free cash flow yield, which creates the potential for a 15% dividend/share repurchase payout.
At oil prices above $80 per barrel WTI, we expect BTE to pay out $0.25 per share annually as a dividend, which would generate a 4.5% yield on the current share price. As the remaining free cash flow is used to repurchase shares, the number of shares outstanding will decline over time and free cash flow per share will increase. Consequently, BTE’s capacity to pay dividends on a per-share basis can grow as long as WTI remains above $80 per barrel and BTE shares remain undervalued by the market.
From a capital appreciation standpoint, BTE shares offer multi-bagger potential due to the huge amount of free cash flow generated at higher oil prices. Our price target for the shares is $9.50, representing 73% upside from the current price.
The challenge in analyzing the investment merits of BTE equity lies in the company’s Eagle Ford assets. The long-term economics of depleting shale assets is receiving more attention, and investors have to be comfortable with the prospects for BTE’s shale acreage to continue generating free cash flow. Particular attention must be paid to the longevity of the assets reserves and the sustainability of their current production mix. We address both issues in this article.