Heading into 2016, Baytex Energy (OTC:BTEG.F) outlined three strategic objectives to help get it through the downturn in the oil market: deploy capital efficiently, cut costs, and maintain strong liquidity. Each quarter the company has taken noticeable steps forward on each objective, which was certainly the case again during the third quarter.
Squeezing more out of every dollar
One of Baytex Energy's aims was to get the most out of each capital dollar spent. Initially, the company planned to spend $325 million to $400 million, which was enough money to produce 74,000 to 78,000 barrels of oil equivalent per day (BOE/D). While that would result in its production declining from last year's average daily rate of 84,648 BOE/D, Baytex needed to cut investment spending to meet its liquidity goal. That is why the company cut spending again early in 2016 when oil prices plunged to start the year, bringing it down to a range of $225 million to $265 million. However, while that was a 33% cut in spending, it would only cause production to be 5% below its initial guidance, reflecting its ability to deploy capital in the most efficient manner. Meanwhile, a few months later, the company cut spending once again, this time to a range of $200 million to $225 million. While that was a 13% cut, it only impacted production by 1%, again showing that the company was stretching its capital dollars.
In the third quarter, Baytex Energy did something it has not done all year: Instead of cutting its production guidance, the company revised it up 2%. However, it did so without adding any additional capital to its budget, though it did say it would spend toward the high end of its $200 million to $225 million guidance range. Still, this result clearly shows that the company is getting the most out of its money this year.
Expenses continue to drop
One of the drivers of Baytex Energy's capital efficiency is its ability to push down drilling costs in the Eagle Ford shale. The company can now drill wells in that play for $5.2 million, which is down from $8.2 million in late 2014.
Another of Baytex Energy's accomplishments this year has been a steady decline in operating costs. During the third quarter, the company noted that its operating expenses were down 12% year over year, to $9.31 per BOE. That helped the company deliver solid funds from operations of $72.1 million during the quarter.
Debt keeps declining
The final aim of Baytex has been to maintain a strong level of liquidity. It has done three things to accomplish this goal. First, as mentioned, it cut capital expenditures spending several times. Second, it amended its bank credit facilities in March, which locked in its liquidity level, lowered borrowing costs, and gave it more breathing room on its financial covenants. Finally, the company has used its excess cash flow and non-core asset sales to trim debt.
During the third quarter, the company sliced another $79 million off its debt, which followed a $39 million reduction last quarter. Driving the latest decline was the sale of the company's operated Eagle Ford shale assets for $54.5 million, as well as excess cash flow. Those actions have combined to push the company's net debt down to $1.86 billion, which is 4.4% lower year over year.
While that is steady progress, it is not the dramatic transformation we have seen at some of Baytex's rivals. Penn West Petroleum (NYSE: PWE), for example, has cut its debt by 70% over the past year by selling assets, including some of its core assets. That said, Penn West did not have much choice because it was dangerously close to breaching its financial covenants earlier this year.
That has not been a worry at Baytex Energy, which has remained safely within its recently amended covenants. Because of that, Baytex said it has no plans to sell any additional assets at this time, while Penn West still intends to sell another $100 million to $200 million in assets before the year is over.
Unlike some rivals, Baytex Energy had no plans to overhaul its business to survive the downturn. Instead, it intended to make incremental improvements by driving down costs, stretching its capital dollars, and strengthening its liquidity. As its third-quarter results clearly show, it is making progress on each aim.