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TheStreet Open House

Baytex Energy Isn't Just a Canadian Oil Producer Anymore -- So Is It a Buy?

NEW YORK (TheStreet) -- Baytex Energy (BTE) used to be a producer of oil and gas, particularly heavy oil, from Peace River and Lloydminster in Alberta and Saskatchewan provinces of Canada -- but not anymore.

In an email to TheStreet, Baytex Energy's senior vice president for capital markets and public affairs Brian Ector has said that starting this year, the company will start getting a third of its total production from the U.S.

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This is because earlier in June, the company closed the biggest acquisition of its history: the purchase of Australia-based Aurora Oil and Gas in a $2.8 billion deal, thereby adding 22,000 net acres at the prolific Eagle Ford shale formation in South Texas to its portfolio. This acreage is situated in the sweet spot of the play, right next to oil and gas producing properties held by Marathon Oil (MRO) , Concho Resources (CXO) , EOG Resources (EOG) and Murphy Oil (MUR) .

Since 2006 till the end of 2013, Baytex Energy has successfully grown its production and reserve base at an average annual rate of 7% and 12% respectively.

Baytex's shares have risen by 8.4% this year, trading in the high-$42 range on Friday. With increasing production and reserves on the back of the new Eagle Ford assets, the company's shares will likely climb higher.

Moreover, Baytex has recently increased its dividends to $0.22 per share, a 9% increase. That translates into a juicy yield of 6.2%, significantly higher than the industry's average of 1.7%, as per data compiled by Thomson Reuters.

The Eagle Ford acquisition has fundamentally changed Baytex in some ways. The acquisition has given Baytex significant exposure to the booming U.S. shale oil and gas industry, making it an important player at Eagle Ford. The region is currently dominated by EOG Resources, the leading producer and acreage holder at Eagle Ford.

Moreover, Baytex has been primarily a heavy oil producer. But its new position at Eagle Ford consists of mainly lighter crudes. Ector explained that the acquisition will diversify the company's product mix into light oil. Moreover, it will give the company access to a region which is capital efficient and has "significant drilling inventory" and a well-established oil transportation infrastructure.

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Additionally, the acquisition has diversified the company's asset base to outside of Canada. The company had some small assets in the U.S., such as the non-core acreage in North Dakota which it sold last month, but Baytex was getting nearly all of its production from Canada.

Ector has said that Baytex completed the acquisition less than seven weeks ago and is now already producing 28,000 barrels of oil equivalents a day from Eagle Ford. In the second half of this year, Ector has predicted that the company will generate 34% of its total output of between 86,000 and 88,000 barrels of oil equivalents a day from Eagle Ford.

In the second quarter of this year, with just 20 days of production from Eagle Ford, the company produced an average of around 66,900 barrels of oil equivalents a day. The anticipated jump in daily production in the second half of this year will be largely driven by the output from Eagle Ford.

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