THE SLEEPER PICK
While Baytex is highly overleveraged, it will turn quickly with rising oil prices
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.