February 10, 2012
Written By Timothy Lutts
“Baytex Energy Corp. (BTE – yield 4.60%) is a Canadian heavy-oil producer, headquartered in Calgary, Alberta. Until a year ago, it was structured as a trust. But because of changes in Canadian tax law, the company switched to a corporate structure, and the result is a growth and income company that pays a very healthy annual dividend of 4.5%, while promising decent growth as well.
“For the record, all figures below are in Canadian dollars, but at current exchange rates, there’s very little difference. Baytex trades on both the New York Stock Exchange and the Toronto Stock Exchange and is suitable for investors in both countries.
“What makes Baytex special? First is that the monthly dividend is generous and very secure. The payout ratio has historically been 40% to 50% of funds from operations. The payout does vary month by month, but has been fluctuating in a tight range between 19 and 22 cents per share, per month.
“Second is that Baytex is a technical oil producer, focused on getting more from its assets through intelligent use of technology, while expanding its assets at a prudent rate. The company’s conservative long-range plan calls for organic growth of 8% per year.
“Third is that Baytex is conservatively managed. It has a strong balance sheet that is in excellent condition with a 36% debt-to-capital ratio. No debt is due before 2014. Furthermore, annual cash requirements (capital expenditures and dividends) of approximately $570 million are nearly matched by cash flow of about $540 million.
“According to Lou Gagliardi [editor of Cabot Global Energy Investor], that’s one of the better free cash flow situations of all the explorers and producers that he tracks, and that’s a main reason for his bullishness on the stock relative to its peers. In his own words, ‘I am confident that BTE will outperform its small- to-mid cap, oil-weighted exploration and production peers over the near term because the chief concerns of the marketplace are excessive leverage and funding gaps, which are not issues for Baytex. I am also bullish on Baytex long-term, as it screens well on my other two fundamental criteria (reserves and production growth), in addition to a strong balance sheet and P&L.’”
Timothy Lutts, Cabot Stock of the Month, 2/12