MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

Should Contrarian Investors Buy Baytex Energy Corp. Today?

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) is starting to attract some contrarian interest after the latest rebound in oil prices sent the stock up nearly 100%.

Let’s take a look at why the company might be an attractive play.

A nasty slide

Baytex used to be one of the energy sector’s most popular dividend stocks, but a big acquisition at the top of the oil market has turned out to be a disaster for shareholders.

In June 2014 Baytex closed its $2.8 billion purchase of Aurora Oil & Gas Limited. The acquisition gave Baytex a key holding in the highly coveted Eagle Ford play, and most market observers praised the deal as a game changer. At the time, the stock traded for more than $45 per share.

The deal certainly had an impact, but not in the way investors had hoped. Oil prices started falling in the weeks that followed, and the massive debt load taken on to pay for the Aurora assets soon became an issue.

By December 2014, Baytex was in trouble. The stock had fallen to $15 per share, and management went into crisis mode. To their credit, the executive team acted quickly, and that probably saved the company. Capital expenditures and the dividend were cut, and new agreements were negotiated with lenders. Baytex even managed to raise capital at a great price when oil staged a brief recovery.

Through the spring of last year the situation looked under control, but the wheels fell off again in the summer and the stock has been on a death spiral ever since, falling below $2 per share last month.

A resurgence in the works?

Baytex finished January with a move back above $3 on the sharp rebound in oil prices, and investors hope the bottom has finally been reached.

There might be reason for optimism.

The company recently renegotiated its lending covenants, again and should be able to avoid a default through the rest of this year, especially if oil prices can muster a move back toward US$40 per barrel. Long-term debt is about $1.6 billion with no material repayments due before 2021, and the company has only drawn down about 25% of its available $800 million and US$200 million credit facilities.

Production should come in at 74,000-78,000 barrels per day this year, and the Baytex has approximately 40% of 2016 output hedged above US$40 per barrel.

Should you buy?

Baytex isn’t for the faint of heart, but the stock is down so low that contrarian investors who believe oil has bottomed might want to start nibbling.

The company holds very attractive assets, and the huge selloff could start to attract suitors. If you take the current market capitalization of roughly $600 million and add in $1.9 billion to pay the outstanding debt, you get a takeover starting price of $2.5 billion. Even with a juicy premium, one of the larger players could potentially scoop Baytex up for less than $3 billion.

If oil begins to send signals that the bottom has definitely been reached, I believe Baytex will go into play and investors could see big gains on the back of an oil surge or a possible bidding war.

The risks are still high and I wouldn’t back up the truck, but it might be worthwhile to start a small position at the current price.

Looking for reliable dividend stocks?

These three top stocks have delivered reliable dividends to shareholders for decades. Check out our special FREE report: "3 Dividend Stocks to Buy and Hold Forever".

Fool contributor Andrew Walker has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.