Shares of Baytex Energy Corp. (OTC:BTEG.F) took off on Monday, rallying more than 10% by 3:30 p.m. EDT. Fueling the Canadian oil producer's rally was a big uptick in crude prices.
The global oil benchmark, Brent, rose more than 3% on Monday, closing above $81 a barrel -- its highest level in four years -- while the U.S. benchmark, West Texas Intermediate (WTI), increased nearly 2% and closed above $72 per barrel. Fueling the rise in oil prices was news that an OPEC-led coalition of oil-producing nations would not increase their production any further despite calls from President Trump to boost their output and push down crude prices. In OPEC's view, the current oil market has a "healthy balance between supply and demand."
However, while the market has plenty of oil at the moment, there are increasing concerns that demand could outpace supply in the coming months as the Trump administration's sanctions against Iran go into effect. That's why oil moved higher on the news, taking most oil stocks up with it.
Baytex Energy enjoyed one of the bigger gains on the day due to how much it will benefit from higher oil prices. The company noted in a recent investor presentation that if WTI averages $55 a barrel, it will generate about 100 million Canadian dollars ($77.3 million) in free cash flow while its leverage ratio would be a concerning 3 times debt to cash flow. However, with WTI now above $70, the company could generate between CA$500 million and CA$700 million ($386 million to $541 million) in free cash flow. That would push Baytex Energy's leverage ratio down to a more comfortable 1.5 while giving it the financial flexibility to drill more wells, pay off additional debt, pursue another acquisition, or reinstate a dividend.
With OPEC keeping a lid on its supply, oil prices are likely to remain high, which should enable Baytex Energy to cash in on an even better oil market. That has investors growing increasingly optimistic about the company's prospects, as it should have the money to expand and continue improving its balance sheet, with the potential to even start rewarding shareholders with a dividend once again.