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Monday January 30, 2012
Baytex: Bullish bet on oil
by Lou Gagliardi, editor Cabot Global Energy Investor  My latest featured stock pick is Baytex (BTE), a leading Canadian heavy-oil producer with an exceptional dividend to provide downside share support in a rocky market. Geopolitical tensions, i.e. Iran, continue to rear its ugly head and reinforce our bullish outlook for crude prices and the energy sector. Here is the short list of why we are bullish on Baytex:
BTE is a mid-cap (C$6.9 billion) E&P that intends to grow production, as well as its dividend. Even though Baytex is signifi cantly weighted to oil in its production profile — 84% of total production and 91% of reserves are oil — I think the company is an exceptional performer in the energy space, driven by: 
I am also bullish on Baytex long-term, as it screens well on my other two fundamental criteria (reserves and production growth), in addition to a strong balance sheet and P&L. Baytex has excellent breadth and depth in its reserve/resource portfolio. The company’s proved plus probable (2P) reserve life is approximately 13 years, and operations are located in three distinct, locations: Seal in central Alberta, Lloydminster in western Saskatchewan and the Bakken in northern North Dakota. The breadth/diversity of locations reduces resource risk while keeping the company’s G&A costs in check. Baytex’s FY 2011 G&A expense is estimated at under C$2.30 per barrel of oil equivalent (boe). Total boe production growth target is 8% per annum for the next five years, with oil production slightly outpacing that number. The lion’s share of that growth will come from cold fl ow and thermal oil production at Seal. Production from Lloydminster is set to grow only 1%–2% per year — but it generates significant free cash flow; for 2011, EBITDA from Lloydminster will be approximately C$250 million with only C$90 million of capital expenditures. Baytex’s 132,000 net acres in the Bakken/Three Forks region only contributes approximately 3% of company-wide production currently, yet there is significant room to run with 100–300 potential net locations. This asset has signifi cant upside production potential, and is also attractive in the M&A arena. Baytex has a deep bench of technical officers on its management team. Four of the top officers have been either CEOs or COOs at other energy companies; this increases our confidence in the company’s ability to execute on its growth plan. Baytex compares very favorable to industry production growth of +5.4% in the 4Q11. For 4Q11, I am modeling +22.6% year-over-year production growth at Baytex. Growing production will help margins hold up in the face of volatile commodity prices and sticky fi eld costs. This is one of the better earnings set-ups going into the quarter that I have seen. Learn more about this financial newsletter at Cabot Global Energy Investor. 
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