Oil companies continue to struggle as oil prices remain weak and banks crank up the pressure to dump assets.
Most investors are steering clear of the space, but contrarian types are looking at some of the beaten-up names in the sector and wondering if there is an opportunity for some big gains.
Let’s take a look at Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Encana Corporation (TSX:ECA)(NYSE:ECA) to see if one is a better rebound bet.
Baytex
This time last year Baytex was celebrating a big acquisition in the Eagle Ford shale play and traded for $45 per share. The company also offered one for the sector’s top dividend yields.
Today the stock can be bought for $6 and there is no dividend at all. That’s how brutal life has been for Batex’s shareholders.
It must be frustrating for senior management because they have pretty much done everything they need to do to survive. They cut the dividend and reduced capex earlier than most of their peers, and raised capital at an opportune time to shore up the balance sheet.
During the second quarter Baytex even brought in funds from operations that covered both the capital expenditures and the reduced dividend.
Unfortunately, oil prices have plummeted since the end of Q2 and Baytex had to eliminate the dividend altogether in the face of an extended rout.
The company expects to finish 2015 with senior debt of $1.8 billion, which would put the senior debt to bank EBITDA at 3.1 times. This is still within the 4.5 times allowed under the renegotiated covenants.
Baytex owns an attractive portfolio of assets, and it wouldn’t be a surprise to see one of the bigger players take a run at the company in the coming months.
Encana
Encana has been caught in the middle of a difficult transition process and shareholders have really taken it on the chin as a result.
Management decided to switch from gas to oil at a time when gas prices were cratering and oil prices still traded above $100 per barrel. The result has been expensive acquisitions of oil properties and less-than-favourable dispositions of gas assets.
The buy high, sell low strategy hasn’t panned out too well, and investors have watched the stock drop by more than 60% in the past 12 months. Encana’s management team is taking a lot of heat, and they should, but to their credit they are executing well and the overall strategy to focus on some of the industry’s top oil plays is actually a logical one, especially if oil prices recover.
As with Baytex, Encana’s main issue is the debt it took on to make expensive acquisitions.
Encana finished 2014 with long-term debt of US$7.8 billion. The company raised about $1.44 billion in capital earlier in the year and used it to pay back notes that were coming due in 2017 and 2018.
The debt load sat at $5.2 billion at the end of Q2, but that should come down again as a result of the recent US$1.3 billion deal to sell its Louisiana-based natural gas assets.
With the balance sheet looking better, Encana is buying itself some breathing room, but cash flow is still an issue.
The company might struggle to hit its 2015 cash flow guidance of US$1.4-1.6 billion, considering it only brought in $676 million in the first half of the year. If oil had stayed at the Q2 levels, it would have been fine. Now, the projection looks a bit ambitious.
Encana’s asset portfolio would definitely be a prize catch for one of the industry’s giants, and investors could see the name go into play in the next year.
Should you buy Baytex or Encana?
At this point, both stocks still look very volatile. If you think oil has bottomed, there is a contrarian case to be made for starting a small position because a surge in crude will send the shares of both companies much higher. Encana can probably survive longer, but I wouldn’t buy either right now. There are better places to put your money.
