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approach to heavy oil and conventional oil & gas aids in the evaluation of
exploration, development and acquisition opportunities
Oil and Gas
Baytex Energy Trust
Suite 2200, Bow Valley Square II
205 5th Avenue S.W.
Calgary AB Canada T2P 2V7
Raymond T. Chan
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
June 2, 2005
Mr. Chan has been President and Chief Executive Officer and a Director of Baytex Energy
Trust since September 2003 pursuant to the reorganization of Baytex Energy Ltd.
Prior thereto, Mr. Chan was Senior Vice President and Chief Financial Officer and a
Director of Baytex Energy Ltd. since October 1998. Mr. Chan had held senior
executive positions in the Canadian oil and gas industry since 1982, including chief
financial officer titles at Tarragon Oil and Gas Limited, American Eagle Petroleums Ltd.
and Gane Energy Corporation. Mr. Chan holds a Bachelor of Commerce degree from The
University of Saskatchewan and is a chartered accountant. He is also a director of
C1 Energy Ltd., Crew Energy Inc., Defiant Resources Corporation and the Alberta
Childrens Hospital Foundation.
Baytex Energy Trust is a conventional oil and gas trust delivering consistent returns to
unitholders and maintaining its production and reserve base through internal property
The base of operations includes a high-quality
portfolio of operated properties, development prospects and land inventory concentrated in
key operational areas of Alberta and Saskatchewan. During 2004, the oil and natural gas
assets generated average production of 34,022 barrels per day comprised of approximately
73% oil and 27% natural gas.
Baytex delivers consistent returns to unitholders
through prudent operational and financial management. Baytex has maintained its monthly
distribution at 15 cents per unit since converting to an energy income trust in September
of 2003. The trust units of Baytex are traded on the Toronto Stock Exchange under
the symbol BTE.UN.
Chan, will you tell us a bit about your background with Baytex?
Mr. Chan: I was trained as a chartered accountant back
in the late 1970s in Calgary. I came to the oil patch in 1981, and I have been CFO
for four different public oil and gas companies. The last company of which I was CFO was
Baytex Energy Ltd., which I joined in 1998. Baytex Energy Ltd., converted into an income
trust in September of 2003. I became CEO of the Trust post conversion.
you tell us about Baytex?
Mr. Chan: Baytex began as an exploration and production
company in 1993. It started with no production, built itself through the drill bit and
acquisitions into a medium sized oil and gas producer over a ten-year period.
is the advantage of the conversion?
Mr. Chan: The advantage of the conversion is that the
income trust sector generally receives a better trading multiple for its equity in the
Canadian stock market. By a better multiple, I mean that the cost of capital in general
would be lower because investors are willing to pay a bit more for your stock. In our
business, if there is a way to lower your cost of capital, that is great.
do you focus geographically and what types of oil and gas do you look for?
Mr. Chan: There are approximately 35 energy trusts in Canada,
and right now, we are probably the only one that has a significant position in heavy oil.
By heavy oil, I mean oil of a lower gravity that sells for less as compared to a barrel of
light oil such as WTI crude. We have approximately 36,000 barrels of oil equivalent per
day of production, of which 60% is heavy oil. The other 40% is made up of natural gas and
light oil. Our geographic concentration in heavy oil is in western Saskatchewan, near the
town of Lloydminster. Our natural gas production is mainly in southern Alberta and in
you happy with the mix and why are you focusing on heavy oil?
Mr. Chan: We like heavy oil for the reason that it is a
commodity with less technical risk associated with it in finding the oil. The risk of
heavy oil is that the price that you get has more volatility than the price for light oil.
You have a lower margin barrel but the barrel is generally easier to find. Also, you are
pursuing a commodity that does not have as much competition. We try to do things
differently so that we do not have to compete head-on with the other trusts on commodities
such as natural gas. We also want some balance in our production portfolio, which is why
we have the 40% of our production base that is not in heavy oil. We are happy with that
because it gives us a good balance so that we are not totally dependent on the fortunes of
heavy oil prices.
are some of the other strengths of Baytex?
Mr. Chan: Because we built our company and asset base
through the drill bit and acquisitions as an exploration and production company over the
last ten years, we actually behave and operate like a normal E&P company. By that, I
mean that we have the technical staff that is required to pursue a geological idea and
turn it into production from cradle to grave. Most income trusts, at least the earlier
models, do not participate in exploration and development activities. Instead, they
rely on buying assets that are more mature and harvest production to distribute cash flow.
That strategy worked well but now that there are thirty plus players and we are all trying
to buy something to replace the natural decline of oil and gas production, the competition
is intense. It would be better to have internal capability to generate replacement barrels
instead of having to rely on buying in the market, and I think that is the advantage of
Baytex just because that is how we have built our business.
CEOCFOinterviews: Do you
have a lot of undeveloped land?
Mr. Chan: We do have a lot of undeveloped land. We have
about 800,000 acres of land as of year-end 2004. That is where we will try to develop the
often do you turn over the properties and are you constantly looking for acquisitions?
Mr. Chan: We always look for acquisitions. In fact, we
have a team at Baytex and their only job is to screen acquisition opportunities and pursue
them. Last year we spent $200 million on two transactions and bought a good number of
properties. Using the dual approach, we can find barrels on our own and look for barrels
that make sense for us to buy and further exploit.
there newer technologies or newer equipment that you are able to use in your processes?
Mr. Chan: Our heavy oil production is what we call
primary or cold production. It does not require any steam assisted recovery techniques or
mining techniques. These are time-tested types of recovery methods. Advancements in
technology help recover more oil over time. In general, when you find an oil deposit you
can only recover ten to fifteen percent of that oil for commercial production. In
time, we think that technological advancement will help us improve this recovery factor
from the low teens to twenty or twenty-five percent. That kind of improvement, although it
may not sound like much, would be a very meaningful addition to our asset base.
the market recognized the value in Baytex?
Mr. Chan: Income trusts in Canada are usually tracked
by what we call cash on cash yield. We have been distributing $0.15 per month per unit
since the inception of the trust. On an annualized basis, that is $1.80 per unit. In the
beginning, our trust units were trading around $10.00, which equated to an 18% cash on
cash yield. While that is good for investors, it is an expensive proposition for the
company. Our current trading price is around $14.00. Our yield has come down to about 13%,
so obviously that is a tremendous improvement from the companys standpoint.
has changed for you now that the price of oil is so high and there is so much discussion
about it going up so significantly?
Mr. Chan: We are a cash generation and distribution
business. It gives the investors an opportunity to benefit from the rising commodity
prices. If our starting number is a $50.00 oil price vs. a $30.00 oil price, obviously it
should give an entity such as Baytex a better chance to sustain its distribution and maybe
even increase it. High oil prices give the income trust model a better chance to maintain
its distribution practice. The down side of high commodity prices that would effect our
operations is that when there is more money, and we are all in the same basin looking for
the same replacement barrel, that would increase the input cost of the new barrels. You
have a highly inflationary environment in finding that replacement barrel, which is where
we try to strike a balance and not over pay for the new barrel, so we can still benefit
from the high oil price.
reaching investors a focus for Baytex?
Mr. Chan: Definitely! We participate in about six to
eight investor conferences a year in different parts of Canada. We also go hold private
meetings with institutional investors and make presentations to retail brokers. These days
there is the internet and everything is distributed through press releases and corporate
presentations. We have an active investor relations program.
should potential investors be interested and what should they know that perhaps they do
not realize when they first look at the company?
Mr. Chan: We are one of the oilier trusts. By that I
mean our production is about 70% towards oil and 30% towards gas. It depends on the
investors personal view of oil price. If the view were bullish on continuing strong
commodity price for oil, it would benefit Baytex more than it would benefit other entities
that are less oil weighted. Baytex is one of the few trusts that have the internal
capability to generate the replacement barrels through the drill bit. We are not
necessarily required to make acquisitions just to keep the barrels flowing. We are not so
much subject to the inflationary environment of the acquisition market. Those two things
combined should prove to the investors that Baytex has its investment merits.
closing, what would you like readers to most remember?
Mr. Chan: I am an accountant by trade, so I do have a
conservative side here. You have to understand that when you buy income trusts or when you
invest in oil and gas equities, there is a risk associated with commodity prices. So
income trusts will flourish if you believe that the interest rate in general is going to
stay low because that is the competing investment vehicle that we always have to deal
with. Also, your view of commodity prices is bullish, then I think this would be an
excellent place to invest money.
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