BTE: Baytex Energy Trust Analysis and Research Report

2018-08-20 - by Asif , Contributing Analyst - 141 views

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General

Baytex Energy Corp. was incorporated on October 22, 2010 pursuant to the provisions of the ABCA. Baytex is the successor to the business of Baytex Energy Trust, which was transitioned to Baytex on December 31, 2010.

Inter-Corporate Relationships

The following table provides the name, the percentage of voting securities owned by it and the jurisdiction of incorporation, continuance, formation or organization of its material subsidiaries either, direct and indirect, as at the date hereof.

Percentage of voting securities (directly or indirectly)Jurisdiction of Incorporation/Formation
Baytex Energy Ltd.100%Alberta
Baytex Energy USA, Inc.100%Delaware
Baytex Energy Partnership100%Alberta

Organizational Structure

The following simplified diagram shows the inter-corporate relationships among it and its material subsidiaries as of the date hereof.

Business development

Baytex Energy Trust is engaged in the business of acquiring, developing, exploiting and holding interests in oil and natural gas properties and related assets in Canada (in Alberta and Saskatchewan) and in the United States (in Texas).

Developments in the Past Three Years

2015

On February 19, in response to the challenging oil price environment and to maintain financial liquidity, the company announced a reduced 2015 capital budget range of $500-$575 million, down from $575-$650 million, along with amendments to its Credit Facilities that relaxed its financial covenants.

On April 2, the company completed a bought deal financing by issuing 36,455,000 Common Shares at a price of $17.35 per Common Share for aggregate gross proceeds of approximately $632.5 million. The net proceeds of the financing were used to reduce bank indebtedness.

On August 20, as a further response to the continued low commodity price environment and to increase the long term sustainability of its business, the company announced the suspension of its dividend. The company also reduced its planned 2015 annual capital spending to approximately $500 million, which included the suspension of drilling in Canada.

On December 10, the company announced a 2016 capital budget range of $325-$400 million along with additional amendments to the financial covenants in its Credit Facilities to provide increased financial flexibility.

2016

On March 3, in response to a further decline in commodity prices, the company announced a reduced 2016 capital budget of $225-$265 million and the shut-in of 7,500 bbl/d of low or negative margin heavy oil production.

On March 31, the company made significant amendments to its Credit Facilities. The amendments included reducing its Credit Facilities to US$575 million, granting its bank lending syndicate first priority security with respect to its assets and restructuring its financial covenants.

In July, the company disposed of its operated assets in Texas with associated production of approximately 1,000 boe/d, realizing net proceeds of approximately $54.2 million.

On November 22, the company entered into an asset acquisition agreement to acquire heavy oil assets in the Peace River area for approximately $65 million. The lands were adjacent to its existing Peace River lands, added approximately 3,000 boe/d of production and more than doubled its land base in the area. The acquisition was financed through a concurrently announced bought deal financing, pursuant to which the company issued 21,907,500 Common Shares at a price of $5.25 per Common Share for aggregate gross proceeds of approximately $115 million. The financing closed on December 12.

On December 12, the company announced a 2017 capital budget range of $300-$350 million.

2017

On January 20, the company closed the previously announced acquisition of heavy oil assets in the Peace River area.

On May 4, Ed LaFehr was appointed Chief Executive Officer, succeeding James Bowzer. On December 7, the company announced a 2018 capital budget range of $325-$375 million.

Business overview

The company's crude oil and natural gas operations are organized into four business units: Lloydminster, Peace River, Conventional and United States. These business units have a portfolio of mineral leases, with operated and/or non-operated properties and development prospects. Within these business units, Baytex has established geographically-organized teams with a full complement of technical professionals (engineers, geoscientists and landmen). This comprehensive technical approach is intended to result in thorough identification and evaluation of exploration, development and acquisition opportunities and cost-efficient execution of those opportunities.

The company endeavour to add value through internal property development and selective acquisitions. Future heavy oil development will focus both on the Peace River oil sands area within the Peace River Business Unit and its historical area of emphasis around west-central Saskatchewan and northeast Alberta within the Lloydminster Business Unit. Tight gas development in Canada is focused on the Pembina area in west-central Alberta within the Conventional Business Unit. Light oil and gas development will focus on the Sugarkane area located in the core of the liquids-rich Eagle Ford shale within the United States Business Unit.

The following is a description of its principal oil and natural gas properties on production or under development as at December 31, 2017. Unless otherwise specified, gross and net acres and well count information are as at December 31, 2017 and production information represents average working interest production for the year ended December 31, 2017.

Principal Properties

The map below highlights the geographic location of its principal properties.

Lloydminster Business Unit

The Lloydminster Business Unit accounted for approximately 13% of total production in 2017. The Lloydminster Business Unit's heavy oil operations include primary and thermal production. In some cases, Baytex's heavy oil reservoirs are waterflooded, occasionally with hot water. Baytex's heavy oil fields often have multiple productive zones, some of which can be commingled within the same producing wellbore. Production is generated from vertical, directional/slant and horizontal wells using progressive cavity pumps capable of handling large volumes of heavy oil combined with gas, water and sand. Initial production from these wells averages between 30 and 200 bbl/d of crude oil with gravities ranging from 10 to 16 degrees API. Once produced, the oil is delivered to markets in Canada and the United States via pipelines, tanker trucks or railways. Heavy crude is usually blended with light-hydrocarbon diluents prior to being introduced into a sales pipeline. The heavy crude Baytex delivers to rail for transport is not blended with diluents. The blended (pipeline) and non-blended (rail) crude oil is then sold by Baytex and may be upgraded into lighter grades of crude or refined into petroleum products such as fuel oil, lubricants and asphalt by the purchasers. All production rates reported are for heavy crude oil, before the addition of diluents.

In 2017, production in the Lloydminster Business Unit averaged approximately 9,137 boe/d, which was comprised of 8,133 bbl/d of heavy oil, 867 bbl/d of bitumen, and 784 Mcf/d of natural gas. During 2017, Baytex drilled 65 (33.0 net)

wells in the Lloydminster Business Unit resulting in 65 (33.0 net) oil wells, for a success rate of 100% (100% net). The company's net undeveloped lands in the Lloydminster Business Unit totaled approximately 185,962 acres at year-end 2017.

The Lloydminster Business Unit possesses a large inventory of development projects within the operating areas of west central Saskatchewan and Cold Lake/Ardmore in Alberta. The company's ability to generate relatively low-cost replacement production through conventional cold production and enhanced recovery methods has historically been key to maintaining its overall production rate. The company's inventory of heavy oil projects allows it to select from a wide range of investment opportunities as economic conditions warrant.

Listed below are brief descriptions of the principal properties within the Lloydminster Business Unit:

Cold Lake/Ardmore, Alberta: The majority of the Cold Lake and Ardmore assets were acquired in 2001 and 2002, respectively, and have been developed extensively for primary production in the General Petroleum, Sparky, McLaren and Colony formations. Average production from the primary assets during 2017 was approximately 621 bbl/d of heavy oil and 260 Mcf/d of natural gas (665 boe/d).

On October 3, 2012, Baytex acquired a 100% working interest in 46 sections of undeveloped oil sands leases in the Angling Lake (Cold Lake) area of northern Alberta. Regulatory approval has been obtained for the construction and operation of a two-stage bitumen recovery scheme using SAGD, which the company refer to as the Gemini SAGD project. The first stage, being a single SAGD well pair with a 600 metre horizontal lateral, was completed with steam circulation into the injector and producer commencing on January 24, 2014. The producing well was converted to production in May 2014 and produced until April 2015, when an electrical fire at the facility resulted in damage to equipment and resulted in the project being suspended. In December 2014, Baytex submitted a scheme amendment application to the Alberta Energy Regulator to modify the facility size from 10,000 bbl/d to 5,000 bbl/d, change the produced water treatment design, utilize self-power generation and add two additional resource areas to the existing development approval. This scheme amendment application was approved by the Alberta Energy Regulator on September 30, 2016.

At year-end 2017, Baytex had 78,781 net undeveloped acres in the Cold Lake/Ardmore area.

Soda Lake, Saskatchewan: The Soda Lake property was acquired by Baytex in 1997. This property consists of separate "North" and "South" oil pools in the Cummings formation. In 2017, 13 (13.0 net) horizontal wells (including three multi-laterals) were drilled. Average production in 2017 was approximately 2,603 bbl/d of heavy oil (2,603 boe/d). At year-end 2017, Baytex had 9,627 net undeveloped acres in this area.

Celtic, Saskatchewan: This property was acquired by Baytex in 2005. Celtic contains a large resource base with multiple prospective horizons within the Mannville Group. As a result, the Celtic property provides a multi-year inventory of drilling locations and re-completion opportunities. Average production in 2017 was approximately 922 bbl/d of heavy oil. At year-end 2017, Baytex had 4,558 net undeveloped acres in this area.

Kerrobert/Hoosier, Saskatchewan: Baytex acquired most of its assets in the Kerrobert and Hoosier areas of Saskatchewan in 2009. These properties provide numerous opportunities for cold infill drilling and SAGD optimization. Production in 2017 from the cold primary and thermal assets averaged approximately 792 bbl/d of heavy oil, 867 bbl/d of bitumen, 2 bbl/d of light oil and NGL and 11 Mcf/d of natural gas (1,663 boe/d). At year-end 2017, Baytex had 33,963 net undeveloped acres in this area.

Tangleflags, Saskatchewan: Baytex acquired the Tangleflags property in 2000. Tangleflags is characterized by multiple-zone reservoirs with production from the McLaren, Waseca, Sparky, General Petroleum and Lloydminster formations. In 2017, Baytex drilled four (4.0 net) horizontal oil wells with a 100% success rate. Average production during 2017 was approximately 1,566 bbl/d of heavy oil and 191 Mcf/d of natural gas (1,597 boe/d). At year-end 2017, Baytex had 4,646 net undeveloped acres in this area.

Peace River Business Unit

The Peace River Business Unit produces heavy gravity crude oil, bitumen, and natural gas mainly from the Bluesky formation in the Peace River region of north west Alberta. This production accounted for approximately 25% of total Baytex production in 2017. In January 2017, Baytex completed the acquisition of 380 net sections of oil sands leases, including 213,760 net acres of undeveloped land, along with associated production of approximately 3,000 boe/d. Baytex held approximately 473,855 net undeveloped acres in the Peace River Business Unit at year-end 2017. In 2017, Baytex drilled nine (9.0 net) horizontal multi-lateral wells and eight (8.0 net) stratigraphic test wells in the Peace River Business Unit.

In certain parts of the Peace River land base, heavy oil can be produced using multi-lateral horizontal wells at initial production rates of approximately 300 bbl/d per well without employing more cost-intensive secondary and tertiary recovery methods. The majority of Baytex's development activity is focused on primary production through this multi-lateral well strategy. However, in some portions of the land base, the reservoir characteristics require thermal stimulation to achieve production. Baytex has demonstrated that CSS can be utilized to extract reserves which are not producible through primary production techniques. If supported by commodity prices, its Cliffdale CSS project, which was suspended in Q3 2015, could be reactivated with minimal expenditure.

Listed below are brief descriptions of the principal properties within the Peace River Business Unit:

Harmon Valley, Alberta: Baytex holds a total of 112 net sections of oil sands leases in the Harmon Valley area. During 2017, Baytex drilled six (6.0 net) wells in Harmon Valley resulting in three (3.0 net) oil wells, and three (3.0 net) stratigraphic/service wells, for a success rate of 100% (100% net). Average production during 2017 from the Harmon Valley area was approximately 12,588 bbl/d of heavy oil, and 3,754 Mcf/d of natural gas (13,214 boe/d). At year-end 2017, Baytex had 37,600 net undeveloped acres of oil sands leases in this area.

In 2017, Baytex commenced construction of a natural gas processing plant in the Harmon Valley area which will process natural gas produced in conjunction with the heavy oil. This plant is anticipated to commence operations in August 2018 and will result in the conservation of approximately 9.0 mmcf/d of natural gas.

Seal, Alberta: At present, Baytex holds a total of 338 net sections of oil sands leases in the Seal area. During 2017, Baytex drilled five (5.0 net) wells in Seal resulting in three (3.0 net) oil wells and two (2.0 net) stratigraphic/service wells, for a success rate of 100% (100% net). Average production during 2017 from the Seal area was approximately 2,978 bbl/d of heavy oil, and 2,415 Mcf/d of natural gas (3,416 boe/d). At year-end 2017, Baytex had 190,760 net undeveloped acres of oil sands leases in this area.

Conventional Business Unit

The Conventional Business Unit produces light oil, natural gas and natural gas liquids from various fields in northern, southeast and central Alberta. This production accounted for approximately 10% of total Baytex production in 2017. During 2017, production from this business unit averaged 6,874 boe/d, which was comprised of 2,165 bbl/d of light oil and NGL and 28,253 Mcf/d of natural gas. At year-end 2017, the company had 134,250 net acres of undeveloped land in this business unit.

The following is a brief description of the principal property within the Conventional Business Unit:

Pembina, Alberta: Baytex acquired its initial position in Pembina in 2007 and further expanded its presence in the area through the acquisition of Burmis Energy Inc. in 2008. Production is primarily from the Cretaceous and Jurassic age formations, including the Cardium, Notikewin, Falher, Ellerslie, Glauconite, Rock Creek and Nordegg. Baytex's oil production in this area is treated at third party-operated oil batteries. Natural gas production is delivered to a combination of four mid-stream gas facilities for processing. Baytex owns a working interest in one of the midstream-operated gas processing facilities. Production from this area during 2017 averaged 1,072 bbl/d of light oil and NGL and 20,792 Mcf/d of natural gas (4,538 boe/d). Baytex drilled four (4.0 net) wells in this area in 2017, resulting in four (4.0 net) natural gas wells. At year-end 2017, Baytex had 28,899 net undeveloped acres in this area.

United States Business Unit

On June 11, 2014, through the acquisition of Aurora Oil & Gas Limited, Baytex acquired a position in the Sugarkane area which is located in the core of the liquids-rich Eagle Ford shale in South Texas. The company's assets include non-operated working interests in approximately 78,112 (19,842 net) acres, comprised of four areas of mutual interest (Sugarloaf, Longhorn, Ipanema and Excelsior), together with field infrastructure and related assets. These assets are operated by Marathon Oil EF LLC, a wholly-owned subsidiary of Marathon Oil Corporation (NYSE: MRO), pursuant to the terms of industry-standard joint operating agreements.

Additional leasehold outside the Sugarkane area (185 net acres) does not meet Baytex’s development or economic criteria but will remain in inventory until the leases expire as their terms come due.

he following table sets forth its gross and net acreage for its United States assets as at December 31, 2017:

Gross AcreageNet Acreage
Sugarloaf AMI241456768
Longhorn AMI301119592
Ipanema AMI47711737
Excelsior AMI190851745
Sugarkane area total7811219842
Other Texas193185
Grand Total7830520027

The map below highlights the geographic location of its Eagle Ford properties and areas of mutual interest in the Sugarkane area:

Production from the non-operated assets is processed at 13 centralized processing facilities across the Sugarkane area, which provide the following capability:

  • infield gathering systems between well locations and these centralized facilities;
  • processing equipment for the treatment of natural gas and compression allowing injection into the transportation system that moves the product to gas processing plants where NGLs are separated from the gas;
  • processing equipment for oil treatment and on site storage in preparation for either injection into oil pipelines that have contracted volumes or for export via trucks to refineries;
  • saline water wells, centralized ponds, and a buried distribution network allowing water to be sent to fracture locations throughout its leasehold interests in the Sugarkane area; and
  • gas lift capability and distribution network to sustain production once wells no longer flow via natural reservoir energy.

During 2017, production from the United States Business Unit averaged approximately 28,313 bbl/d of light oil and NGL and 50,189 Mcf/d of shale gas (36,678 boe/d). During this period, Baytex participated in the drilling of 140 (32.8 net) wells in the Sugarkane area, resulting in 90 (17.9 net) oil wells and 50 (14.9 net) natural gas wells for a success rate of 100%.

Tax Horizon

Baytex does not expect to pay any material cash income taxes prior to 2022. This estimate and any amount of income tax the company may be required to pay in the future is highly sensitive to assumptions regarding commodity prices, production, adjusted funds flow, capital expenditure levels and changes in governing tax laws. For additional information, see Note 15 of its audited consolidated financial statements for the year ended December 31, 2017 and the information under the headings "Income Taxes" and "Tax Pools" in its MD&A for the year ended December 31, 2017.

Production Estimates

The following table sets out the volumes of its working interest production estimated for the year ending December 31, 2018, which is reflected in the estimate of future net revenue disclosed in the forecast price tables

Heavy Oil (bbl/d)Bitumen (bbl/d)Light and Medium Oil (bbl/d)Tight Oil (bbl/d)NGL (bbl/d)Shale Gas (Mcf/d)Natural Gas (Mcf/d)Oil Equivalent (boe/d)
CANADA
Total Proved210813846829183188428379
Total Proved plus Probable2304263671410703643431534
UNITED STATES
Total Proved1035115838309611639434082
Total Proved plus Probable1035116272317271639434644
TOTAL
Total Proved210813846821035116756309614827862461
Total Proved plus Probable230426367141035117342317275282766178

The two properties that account for 20% or more of the estimated 2018 production volumes are the Eagle Ford and Peace River (cold primary production). Estimated 2018 production volumes for Eagle Ford are 34,082 boe/d on a total proved basis and 34,644 boe/d on a total proved plus probable basis. Estimated 2018 production volumes for Peace River (cold primary production) are 15,529 boe/d on a total proved basis and 16,369 boe/d on a total proved plus probable basis.

Marketing Arrangements

Baytex markets its oil and natural gas production with attention to maximizing value and counterparty performance. The company maintain a portfolio of sales contracts with a variety of pricing mechanisms, term commitments and customers. The company engage a number of reputable counterparties in its bid process to ensure competitiveness, while also managing counterparty credit exposure.

Oil and NGL

For the year ended December 31, 2017, the prompt price settlements of WTI fluctuated from a low of US$42.53/bbl on June 21 to a high of US$60.42/bbl on December 29, with an average price of US$50.95/bbl. WTI remained depressed over the first half of the year as inventory levels in the United States remained high despite the OPEC supply accord. In the second half of the year, OPEC compliance with its supply accord remained strong and inventories in the United States began to decrease, causing WTI prices to increase through to year-end.

The discount for Canadian heavy oil, as measured by the WCS price differential to WTI, averaged US$11.98/bbl in 2017, as compared to US$13.84 in 2016.

For 2017, Baytex's heavy oil sales prices averaged $38.46/bbl, while light oil and condensate prices averaged $63.74/bbl. In contrast, for 2016 Baytex averaged $26.46/bbl for heavy oil sales and $50.32/bbl for light oil and condensate sales. Baytex's NGL price in 2017 was $25.86/bbl, as compared with $17.16/bbl in 2016. In 2017, Baytex's US light oil and condensate price realizations averaged $64.17/bbl, as compared to $50.60/bbl in 2016, as the average annual price for the WTI benchmark increased by 18% from US$43.33/bbl in 2016 to US$50.95/bbl in 2017.

Natural Gas

For the year ended December 31, 2017, the average AECO natural gas price was $2.43/Mcf, as compared to $2.09/Mcf in the same period of 2016 and the average NYMEX natural gas price was US$3.11/MMbtu in 2017 as compared to US$2.46/MMbtu in 2016. The increase in natural gas prices in North America stemmed from higher demand in the United States, improved LNG exports and increased exports to Mexico. For 2017, Baytex's average realized natural gas sales price was $3.24/Mcf, as compared to $2.69/Mcf in 2016.

Forward Contracts

For details on its contractual commitments to sell natural gas and crude oil which were outstanding at December 31, 2017, see Note 18 to its audited consolidated financial statements for the year ended December 31, 2017.

Environmental Policies

Baytex Energy Trust has an active program to monitor and comply with all environmental laws, rules and regulations applicable to its operations. The company's policies require that all employees and contractors report all breaches or potential breaches of environmental laws, rules and regulations to its senior management and all applicable governmental authorities. Any material breaches of environmental law, rules and regulations must be reported to the Board of Directors. The company's Health, Safety and Environment policy is available on its website at www.baytexenergy.com.

The company published its Corporate Responsibility Report in September 2017, detailing its efforts and performance in environmental management, health and safety, leadership culture, community investment, stakeholder engagement and corporate governance. This report can also be viewed on its website at www.baytexenergy.com.

Employees

As at December 31, 2017, the company had 136 employees in its Calgary head office, 3 employees in its Houston office and 89 employees in its field operations


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