Baytex Energy Trust (NYSE:BTE) may be known primarily as a Canadian heavy oil energy trust, but all that may change over the next few years as the company is set to convert to a dividend paying corporation with a large inventory of light oil opportunities to develop.
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Baytex Energy Trust has most of its current production and reserves from heavy oil properties in Canada. In 2009, production of heavy oil was approximately 60% of total production, and averaged approximately 26,000 barrels of oil equivalent (BOE) per day. Reserves of heavy oil are 70% of total reserves.
Heavy oil is oil with high viscosity, and is usually defined as oil with an API gravity below 22.3 degrees. In laymen's terms, this refers to oil that is located in accessible reservoirs but doesn't flow as well and therefore is more difficult and costly to extract from the ground relative to light oil. Heavy oil also sells at a discount to light oil.
Baytex Energy Trust is active in these heavy oil areas and drilled 90 wells in 2009. The company has 382,000 undeveloped acres scattered over nine separate project areas.
One heavy oil property that Baytex Energy Trust is working on is the Seal project in Alberta. The company has 67,000 acres located on 105 sections. During the primary development phase, the company is drilling up to 12 wells per section and estimates that it can recover up to 7% of the original oil in place of 50 million BOE per section. Production from Seal averaged 9,000 BOE per day in the second quarter of 2010.
Baytex Energy Trust also has light oil properties in the United States and Canada. The company has between 150 and 300 potential net locations in North Dakota that is prospective for the Bakken and Three Forks formation. Current production here is negligible but the company has an aggressive drilling plan scheduled for 2010 and will drill 20 gross wells here.
Whiting Petroleum (NYSE:WLL) recently reported two completions into the Three Forks formation in North Dakota. Both wells flowed at more than 2,000 BOE during a 24-hour test period.
Baytex Energy Trust also has other light oil exposure in the Viking Sands formation in several areas in Alberta and Saskatchewan.
Due to a change in tax laws in Canada, Baytex Energy Trust is converting from a trust to a corporation in 2011. The company intends to maintain its monthly distribution of $0.18 CAD per share, giving the company a yield of 6%. The tax treatment of dividends and capital gains for U.S. investors is complex and should be researched prior to investing.
Other Canadian trusts have cut payouts as they anticipate converting to a corporation in 2011. Penn West Energt Trust (NYSE:PWE) cut its payout by 40%. Another of the higher yielding Canadian energy trusts is Provident Energy Trust (NYSE:PVX) with a yield of 10%.
The Bottom Line
Baytex Energy Trust has a majority of reserves and production from heavy oil properties in western Canada, but this is slowly changing as the company pursues light oil opportunities in other areas. (To learn more, see our Oil And Gas Industry Primer.)
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