Baytex Energy (NYSE:BTE) apparently found a deal that it just could not pass up. That would explain why the financially strapped Canadian oil producer agreed to purchase heavy oil assets in the Peace River area of northern Alberta in a 65 million Canadian dollar deal. This transaction is noteworthy because it is a clear bet that the company sees oil prices heading higher in the future.
Drilling down into the deal
Baytex is buying assets adjacent to its existing Peace River properties, and will more than double its land base in the area. Meanwhile, the acquired assets currently produce about 3,000 barrels of oil equivalent per day (BOE/D), which boosts its Peace River production by 20% and companywide production by 4.4%.
Concurrent with the acquisition, Baytex announced that it intends to sell CA$100 million of equity via a bought-deal offering in Canada. That transaction will enable the company to pay for the purchase as well as reduce bank debt and fund capital expenditures. By issuing equity, the company will avoid tacking on any more debt, which is important considering that it has spent much of this year striving to match capex with cash flow to avoid increasing bank borrowings. In fact, thanks to non-core asset sales as well its ability to generate some excess cash flow, Baytex has reduced debt by CA$186 million year to date. That number will come down even further with this deal, given that Baytex is raising more money than it needs.
Baytex Energy's ability to issue equity is noteworthy because it had been tough for oil companies to access the capital market until recently. However, more companies are taking advantage of the currently open window because there's no telling how long it will last. For example, Crescent Point Energy (NYSE:CPG) recently completed a bought-deal financing of its own, raising CA$650 million. That capital will enable Crescent Point Energy to pay down some of its bank borrowings, as well as accelerate production growth later next year. In fact, Crescent Point intends to invest CA$450 million in the second half of 2017, to boost its output by as much as 8%.
A bet on the future
For Baytex, this transaction is not just for the incremental production and balance-sheet boost. That is partially because the current output of those assets only represents half of their capacity, after the prior owner chose to shut in another 3,000 BOE/D due to low oil prices and regulatory requirements. Baytex estimates that it would cost about CA$30 million to restart those wells. That said, the company will not do so until oil prices are more favorable, so it could be quite some time before those wells are back online.
In addition to that near-term upside, the company has identified 153 future drilling locations, which boost its drilling inventory at Peace River to 350 future wells. That said, due to current pricing and the company's tight financial situation, it is not drilling any wells at Peace River right now, nor at its other heavy oil properties in Lloydminster. While it is considering restarting its Canadian drilling program next year, it likely needs crude to move closer to $60 a barrel. The company needs $55 oil just to produce enough cash flow from existing wells to reinvest in enough new wells to maintain its current production rate. Furthermore, the near-term priority for capital is to drill more wells in the Eagle Ford shale of Texas, due to their higher returns. However, when conditions warrant, these newly acquired properties have ample upside.
While these are challenging times for the industry and Baytex Energy, those challenges are also bringing unique opportunities. In this case, Baytex was able to pick up assets that have tremendous upside once oil prices improve a bit more. Furthermore, it was able to use this transaction as a springboard to bolster its balance sheet and liquidity, putting it in an even better position to accelerate its growth when conditions do finally improve.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.