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.
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.
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.
An increase in production of light oil from Eagle Ford will likely give a boost to the company's revenues and profits, since light oil commands a higher price than heavier oil. In the last quarter, Baytex realized a 15% premium on light oil and natural gas liquid prices over heavy oil.
It is worth mentioning here that Marathon Oil is the operator at a majority of Baytex's Eagle Ford acreage. This can be a cause of concern for Baytex's investors, as the company will have little to no operational control over this key asset.
That said, Marathon Oil has a history of successful operations at Eagle Ford and is one of the top producers of the ultra-light crude oil, called condensates, from the region. Moreover, Baytex is headed by James Bowzer, a former Marathon Oil executive with experience working at Eagle Ford.
Overall, Baytex has forecast production of around 75,000 barrels of oil equivalents per day for 2014, an increase of 31% from last year.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BAYTEX ENERGY CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate BAYTEX ENERGY CORP (BTE) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 2.6%. Since the same quarter one year prior, revenues rose by 30.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The gross profit margin for BAYTEX ENERGY CORP is rather high; currently it is at 66.13%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 10.10% is above that of the industry average.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 1.7% when compared to the same quarter one year prior, going from $36.19 million to $36.80 million.
- Net operating cash flow has declined marginally to $152.09 million or 5.12% when compared to the same quarter last year. Despite a decrease in cash flow of 5.12%, BAYTEX ENERGY CORP is in line with the industry average cash flow growth rate of -6.58%.
- BTE's debt-to-equity ratio of 0.86 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that BTE's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.55 is low and demonstrates weak liquidity.
- You can view the full analysis from the report here: BTE Ratings Report