Penn West Petroleum Ltd. and Baytex Energy Corp. Are Ripe for a Takeout

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) are very attractive to all acquirers right now.

| More on:
The Motley Fool

In previous articles, I have argued that both Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) would make ideal takeover targets.

Plenty of others agree. The two oil producers are often cited as companies that could get bought out, both by analysts and by the media. Furthermore, both stocks took off in the days following Suncor Energy Inc.’s bid for Canadian Oil Sands Ltd. Clearly, investors are looking to profit from the next merger.

With that in mind, what makes these companies great takeover targets?

A comparison

Penn West Baytex
Market capitalization $750 million $1.3 billion
Net debt $1.8 billion $1.8 billion
Enterprise value $2.5 billion $3.1 billion
Production (boe/d) 81,000 85,000
EV/Production $31,000 $36,000

The last line in this table is particularly important, because it shows how expensive the companies are per unit of production. Based on this metric, Penn West appears slightly cheaper, which shouldn’t be surprising given its history and leverage. The company’s debt is also maturing sooner than Baytex’s, which may also contribute to the cheaper price.

Baytex’s economics are also slightly better. To illustrate, Penn West’s core Cardium and Viking wells earn roughly a 20% rate of return at US$50 oil. Given the same oil price, Baytex could earn well over 30% at Eagle Ford and Lloydminster. The company’s Eagle Ford assets are particularly efficient—they can earn a 10% return even at US$35 oil.

Why both would make excellent targets

By practically any standard, both Penn West and Baytex are very cheap. Suncor’s bid for COS equaled over $60,000 per daily barrel of production. For MEG Energy Corp. and Crescent Point Energy Corp., that number is close to $80,000. And if one looks at the cost of developing new projects, such as Imperial Oil Limited’s Kearl mine, the number can get even higher.

Thus a large energy producer could score a nice bargain by acquiring either of these two companies, even after paying a fat premium. Better yet, the acquirer should be able to achieve some modest synergies, and/or renegotiate the target company’s debt. Either move would make an acquisition even more favourable.

Are these companies buys?

Buying any energy company today is extremely risky. Lacklustre Chinese demand, soon-to-come Iranian exports, and cost cutting from American producers should keep a lid on oil prices for a long time.

But if you’re looking for some oil exposure without investing very much of your portfolio, then you should add both to your portfolio.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »