Why Is Baytex Energy Corp. up 290%?

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) is ready for the future.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Since hitting lows of just $1.57 early this year, shares of Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) have rocketed upward, rising over 290% and breaching the $6 mark this week.

While many have called the rally overdone, the stock is still down roughly 85% over the past five years. Looking at a long-term chart (see below), the recent rally looks like a mere blip in an otherwise troubled operating history.

Why have shares exploded? What should you make of it?

generate_fund_chart

Back from the brink

With Brent crude oil approaching US$50 a barrel, the rise in energy prices came at just the right time for Baytex given its struggles managing its outsized debt load. Currently, its total debt is nearly twice the size of its market cap.

In February, Moody’s downgraded Baytex’s debt below investment grade, giving the company a negative outlook. “The downgrade reflects the material decline in Baytex’s cash flow we expect in 2016 and 2017, which will result in weak cash flow–based leverage metrics,” a Moody’s analyst said. “Baytex will also breach financial covenants in 2016 and will need to get relief from its banks.”

While rating downgrades are typically backward looking, it has a real impact on the short-term cost of financing. Most companies that fall below investment grade see their bonds forcibly sold off by mutual funds that are mandated to only hold investment-grade securities. This also creates lower demand for future debt rounds.

While bankruptcy had been a legitimate concern, higher oil prices open up considerably more options for both equity and debt financing. That combined with the fact that 80% of 2016 oil production is already hedged gives investors hope that Baytex can continue to weather the downturn without reaching insolvency.

Years of breathing room

So while the recent rally was abetted by a pop in oil prices, the magnitude was so large because bankruptcy fears have been taken off the table.

Today, Baytex investors can be reasonably assured that, barring another collapse in oil prices, the company should survive for at least another few years. No major debt repayments come due until 2020, and the company’s management team has done well to renegotiate financial covenants to avoid a technical default. For example, its current senior-secured-debt-to-EBITDA ratio is 0.5:1. Its maximum allowed ratio is 5:1.

You must think long term

Despite the near-term optimism, investing in Baytex must be a long-term proposition. All-in production costs are still estimated to be US$40-45 a barrel, so without continued pricing improvements, the company would still face future financing troubles. If you’re looking to play the oil rebound that’s set to occur in the coming years, however, Baytex looks like a great choice to ride the wave, as long as you’re willing to put up with volatility in the interim.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Up by 25%: Is Cenovus Stock a Good Buy in February 2023?

After a powerful bullish run, the energy sector in Canada has finally stabilized, and it might be ripe for a…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Cenovus Stock: Here’s What’s Coming Next

Cenovus stock has rallied strong along with commodity prices. Expect more as the company continues to digest its Husky acquisition.

Read more »

A stock price graph showing growth over time
Energy Stocks

What Share Buybacks Mean for Energy Investors in 2023 and 1 TSX Stock That Could Outperform

Will TSX energy stocks continue to delight investors in 2023?

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

2 Top TSX Energy Stocks That Could Beat Vermilion Energy

TSX energy stocks will likely outperform in 2023. But not all are equally well placed.

Read more »

Gas pipelines
Energy Stocks

Suncor Stock: How High Could it Go in 2023?

Suncor stock is starting off 2023 as an undervalued underdog, but after a record year, the company is standing strong…

Read more »

oil and natural gas
Energy Stocks

Should You Buy Emera Stock in February 2023?

Emera stock has returned 9% compounded annually in the last 10 years, including dividends.

Read more »

grow money, wealth build
Energy Stocks

TFSA: Investing $8,000 in Enbridge Stock Today Could Bring $500 in Tax-Free Dividends

TSX dividend stocks such as Enbridge can be held in a TFSA to allow shareholders generate tax-free dividend income each…

Read more »

oil and natural gas
Energy Stocks

3 TSX Energy Stocks to Buy if the Slump Continues

Three energy stocks trading at depressed prices due to the oil slump are buying opportunities before demand returns.

Read more »