While Bay­tex is highly over­lever­aged, it will turn quickly with ris­ing oil prices

Alberta Venture - - On The Money -


Bay­tex En­ergy has three core as­sets: Two of them are Cana­dian heavy oil plays lo­cated near Lloy­d­min­ster and Peace River, Al­berta, and the third is the Ea­gle Ford shale in Texas.

The Ea­gle Ford is ca­pa­ble of turn­ing a profit at lower oil prices than the Lloy­d­min­ster and Peace River prop­er­ties. With a typ­i­cal $15 dif­fer­en­tial be­tween West Texas In­ter­me­di­ate pric­ing and Western Canada Select (heavy oil) pric­ing, $45 WTI equates to just $30 WCS for the heavy oil as­sets. To make money gen­er­at­ing oil at $30 per bar­rel a field would


need to have vir­tu­ally no pro­duc­tion costs.

Bay­tex’s oper­at­ing cost for pro­duc­ing a bar­rel of Cana­dian heavy oil in Q1 of this year was $10.91. That com­pares to $8.17 in the Ea­gle Ford, and the heavy oil op­er­a­tions barely gen­er­ated pos­i­tive oper­at­ing net­backs in the first quar­ter. That is bad con­sid­er­ing that oper­at­ing net­backs don’t in­clude any of the cost of drilling the wells.

There is some­thing else you need to know: The eco­nom­ics of heavy oil get bet­ter quickly as oil prices in­crease. If WTI prices were to re­cover to just $60 per bar­rel, the Cana­dian heavy oil wells ac­tu­ally gen­er­ate bet­ter eco­nom­ics than the Ea­gle Ford. At $70 per bar­rel these wells gen­er­ate world class re­turns on in­vest­ment.

The rea­son for this is par­tially be­cause these heavy oil wells have a much higher fixed cost com­po­nent which doesn’t rise as oil prices do. The other fac­tor is just how low the WCS dif­fer­en­tial drives heavy oil prices down. Just a $5 per bar­rel oil price in­crease is a 26 per cent in­crease in Bay­tex’s Q1 WCS sales price.

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