Oil Price Sensitivity Analysis For Baytex, Crescent Point, Cardinal, Bonterra, And Whitecap
Oil Price Sensitivity Analysis For Baytex, Crescent Point, Cardinal, Bonterra, And Whitecap
Note: Dollar references are to Canadian dollars unless specified otherwise.
It’s been a while since we reviewed our holdings’ free cash flow generation at different oil prices. The recent selloff has significantly increased prospective returns, and each is worth considering as a long-term holding.
Below, we review the free cash flow generation potential that our conventional E&P holdings possess at different WTI prices and constant $3.00 per Mcf AECO natural gas prices.
Baytex Energy
Baytex’s (BTE) stock has yet to fully recover from the disastrous reception it received after it acquired Ranger Oil in June. The deal added debt and increased BTE’s exposure to shale production. In doing so, it reduced the company’s netback while barely extending its reserve life.
Despite the negatives, we’ve come to like the deal, primarily because it doesn’t change BTE’s explosive upside amid higher oil prices. At US$85 per barrel WTI, BTE generates $1.58 per share of free cash flow, which would put the shares at $13.19 at a 12% free cash flow yield, implying 144% upside.
The downside for BTE is its shorter inventory runway relative to peers. At current production rates, its reserves have a life of approximately 12 years, though extensions of its Canadian acreage are likely to extend its reserve life over time. The shorter reserve life may cause BTE’s shares to trade at a higher free cash flow yield to ensure shareholders receive a return of their capital before the company’s drilling inventory is exhausted.
We expect BTE’s management to allocate free cash flow to shareholders, which would allow for a rapid return of capital on the current stock price if oil prices were sustained in the $80s per barrel range. Tremendous returns on capital would quickly follow.