Energy Summary for Dec. 7, 2017
WEST TEXAS Intermediate crude for January delivery gained 73 cents to $56.69 on the New York Merc, while Brent for February gained 98 cents to $62.20 (all figures in this para U.S.). Western Canadian Select traded at a discount of $17.30 to WTI ($39.39), unchanged. Natural gas for January lost 16 cents to $2.76. The TSX energy index closed up a fraction to 185.64.
Baytex Energy Corp. (BTE) fell six cents to $4.04 on 4.52 million shares after releasing its 2018 plans, which can be summed up in the following words from president and chief executive officer Ed LaFehr: modestly increased activity (specifically, drilling activity). Notably, there was no mention at all of the company’s heavy debt load. On Sept. 30, Baytex had net debt of just under $1.75-billion. We will return to this in a moment.
Baytex has set a capital expenditure budget of $325-million to $375-million for 2018, compared with a range of $310-million to $330-million for 2017. It plans to spend more than 80 per cent of the 2018 budget on drilling and completions in its three core areas: the Texas Eagle Ford, Alberta’s Lloydminster area and Alberta’s Peace River area. Much of the remaining budget will go to facilities. For instance, Baytex plans to build a natural gas plant in Peace River to increase its capacity by 18 million cubic feet (or 3,000 barrels of oil equivalent) a day. All in all, the company e xpect s to pro duce 68,000 to 72,000 barrels of oil equivalent a day in 2018. This range includes within it the production guidance for 2017 of 69,500 to 70,000 barrels a day. Although Baytex is giving itself some room to increase production, it is also giving itself a cushion, just as it did this year. Its original production guidance for 2017 was 60,000 to 70,000 barrels a day, and even after it produced 71,065 barrels a day in the first half of the year, it did not lift its full-year guidance. This turned out to be a prudent decision. In the third quarter, Baytex was forced to shut in production in the Eagle Ford for one week because of tropical storm Harvey. (The Eagle Ford contributes half of the company’s total production.) Then in October, it temporarily shut in production in Alberta while natural gas prices were too low. According to the company’s website, as of December, it has produced 70,473 barrels a day in the year to date. Although it expects to end the year producing less, between 68,000 and 69,000 barrels a day, its full-year production will likely come in near the high end of its guidance.
As for the company’s debt, Mr. LaFehr said at the end of 2016 that debt reduction was going to be a priority in 2017. All that Baytex has done this year, how ever, was sel l a $7.3-million non-core asset in Alberta to repay a tiny portion of the debt. Partly because of a more favourable Canadian dollar/U.S. dollar exchange rate, the company’s net debt decreased to just under $1.75-billion on Sept. 30, 2017, from $1.77-billion on Dec. 31, 2016. Baytex took on much of its debt in mid-2014, when it entered the Eagle Ford in a $2.8-billion deal that included the assumption of $900-million worth of debts. At the time, Baytex was trading between $46 and $50. The Eagle Ford deal closed shortly before oil prices (and Baytex’s stock) crashed. Among the steps that Baytex has taken since then is to reduce capital spending to the $300-million level in 2017 from about $520-million in 2015. Of course, production has also come down to about 70,000 barrels a day in 2017 from about 84,650 barrels a day in 2015. This is why investors yawned at the “modestly increased activity” in 2018.
Along with its 2018 guidance, Baytex has also announced the retirement of two directors, John Brussa and Rusty Goepel, effective in May. Mr. Brussa, who is a partner at Calgary law firm Burnet, Duckworth & Palmer, is a frequent director of oil and gas companies, currently seven others besides Baytex. Mr. Goepel, a senior vice-president of Raymond James, has been a director of about half a dozen public companies in various sectors, currently only Baytex.
Another oil and gas producer that has released its 2018 guidance, Athabasca Oil Corp. (ATH), fell four cents to $1.13 on 3.07 million shares. It expects to produce 38,500 to 41,000 barrels of oil equivalent a day in 2018, up from 35,000 barrels a day in 2017. Although the 2018 figures are higher than the 2017 estimate, they are slightly lower than analysts’ predictions of about 42,270 barrels a day. The company’s 2018 capex budget of $140-million is also lower than analysts’ predictions of about $148-million, but Canaccord Genuity analyst Dennis Fong remains optimistic about Athabasca Oil. In a research note this morning, he mused that the lower-than-expected capex for 2018 might turn out to be good for dealing with oil price volatility. He also noted that Athabasca Oil plans to reassess its budget in mid-2018, at which point it could decide to increase its spending in the Placid Montney. Mr. Fong has high hopes for the Montney, where four of Athabasca Oil’s recently drilled wells produced an average of 1,100 barrels a day per well. This is higher than the company’s prediction of 1,000 barrels a day and higher than Mr. Fong’s own prediction of 845 barrels a day. He is thus quite pleased . He main tains his rating of “speculative buy” and his price target of $2.25.
For its part, the company explains that it set its 2018 budget at $140-million to keep it within the expected 2018 cash flow of $145-million. For context, its budget for 2017 is $210-million, while its cash flow estimate is $80-million. When the year began, Athabasca Oil was hoping to spend capital to boost production at its Hangingstone thermal oil project to the full capacity of 12,000 barrels of oil equivalent a day from the current production level of about 8,000 barrels a day. Since then, however, the company appears to have realized that it will take a while to reach full capacity at Hangingstone, as a result of the Fort McMurray fire last year. In any case, Hangingstone and another thermal oil project, Leismer, are expected to contribute over 70 per cent of total production next year. The rest will come from light oil projects in the Montney and the Kaybob Duvernay.
Scotia Capital analyst Jason Bouvier remains neutral on the stock and is “looking for a longer history of sustainability before becoming more bullish.” Notably, in 2016, the company produced only 12,000 barrels of oil equivalent a day. That was before it acquired Leismer from Norway’s Statoil. Mr. Bouvier maintains his rating of “sector perform” and his price target of $1.40.