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Canadian oil company Baytex Energy (NYSE: BTE) recently reported solid, though unspectacular,third-quarter results. While the company is battling against very harsh operating conditions, it is making progress in several key areas. That is evident by the comments of CEO Jim Bowzer on the company's third-quarter conference call, where he detailed three achievements.
1. Spending money where it matters most
One area that Bowzer highlighted was the company's operating results. As he pointed out:
Our emphasis on deploying capital efficiently was evident during the third quarter as we continue to curtail our level of capital spending and focus all development activity in the Eagle Ford. In the third quarter, our exploration and development expenditure totaled $40 million as compared to $36 million in the second quarter and $82 million in the first quarter.
Bowzer noted that Baytex continues to limit its capital spending to the Eagle Ford shale because that is where it can achieve the best returns. At the current mid-$40 oil price, the company can earn more than 50% drilling returns in the Eagle Ford compared to sub-25% returns at its two heavy oil properties in Canada. However, despite the lucrative returns, Bowzer noted that the company continues to keep a lid on spending to conserve cash given its tight financial situation as well as how volatile oil has been this year.
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2. Continuing to capture cost savings
One of the reasons the company's returns are so lucrative in the Eagle Ford is due to the cost savings it has achieved over the past two years. Bowzer noted:
Costs in the Eagle Ford have continued to decrease with wells now being drilled, completed, and equipped for approximately $5.2 million per well, compared to $8.2 million in late 2014. The prevailing commodity price environment has not supported drilling on our Canadian assets in 2016. However, we continue to actively build on the 20% cost reductions we achieved in 2015 and strengthen the size and quality of our prospect inventory.
If not for the $3 million in well costs reductions, it is quite likely that Baytex would not have been able to justify drilling any Eagle Ford wells this year, which has been the fate of its Canadian operations. That said, just because the company cannot justify drilling in Canada doesn't mean that it is not working to get those costs down so that it can resume drilling when conditions improve.
However, it is worth noting that some of its rivals have already started to take advantage of the falling costsin Canada to increase heavy oil drilling activity. Canadian Natural Resources (NYSE: CNQ), for example, drilled 85 net heavy oil wells last quarter, reversing its 2014 decision to reduce the primary heavy oil drilling program. The net result is that Canadian Natural Resources' primary heavy oil production was down just 1% sequentially, which puts it closer to reversing a decline that saw production slip 6% sequentially during the second quarter and 18% year over year.
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3. Improving liquidity
Another reason Canadian Natural Resources could resume heavy oil drilling last quarter is that it has more liquidity than Baytex. The company's leverage is not only well within its target range, but it had $2.35 billion of undrawn capacity on its credit facility. Baytex, on the other hand, has too much debt for the current environment, which is forcing it to take action to improve is liquidity. For 2016, that meant investing within cash flow to minimize borrowing. Those efforts are working, according to Bowzer, who said that during the third quarter:
Funds from operations totaled $72 million as compared to capital expenditures of $40 million; and in the first nine months of 2016, our funds from operations totaled $199 million as compared to capital expenditures of $157 million.
Because it spent less than it brought in, as well as completed some minor asset sales, Baytex has reduced total debt by $186 million so far this year. That has improved its liquidity by a meaningful amount, including boosting the unutilized capacity of its $575 million credit facility to $464 million. This capital gives it the flexibility to ramp up drilling activities when oil prices improve.
Weak oil prices have made things tough on Baytex Energy. The company, however, has responded by focusing its capital dollars where it can achieve the best returns, which it has enhanced by pushing costs down. Those efforts have enabled the company to do more for less, which has increased its liquidity and put in a better position to capture opportunities that lie ahead once oil prices head higher.
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