Let’s look at both companies to see if one is an attractive contrarian bet today.
Back in June 2014 Baytex was a hot stock. The company had just closed its $2.8 billion purchase of prime property in the coveted Eagle Ford oil play, and management hiked the dividend based on expected additional revenue from the new assets.
WTI oil sat above US$100 per barrel at the time, so the jubilance appeared warranted.
Then things started to fall apart.
Oil began its slide through the summer of that year, and by the time the rout hit its darkest days in early 2016, Batex was trading for less than $2 per share–down from about $48 just 18 months earlier.
The company has done a good job of staying alive by reducing capital expenditures, cutting the dividend, and negotiating new terms with lenders, but it still isn’t out of the woods.
Output fell 7% in Q2 compared with the same period last year, and funds from operations (FFO) fell nearly 50%.
Long-term debt remains a concern. The company finished Q2 with $1.54 billion in outstanding notes and used CAD$347 million of its US$575 million (about CAD$750 million) credit line by the end of the quarter. Net debt and the end of Q2 was $1.94 billion.
The limited space on the credit facilities means things could get tight if oil decides to give back the gains of the past six months.
Cameco is also feeling the pain from a commodity crash.
In early 2011 uranium traded for US$70 per pound, and Cameco was worth about $40 per share. Today, uranium is below US$30 per pound, and Cameco can be picked up for $12.25.
The Fukushima nuclear disaster in Japan sent the uranium market into a free fall in the winter of 2011, and the sector still hasn’t recovered.
Japan has 43 operable nuclear power facilities, but only three are back in service. The restart process has been longer than expected, and there is little indication the pace will accelerate.
What’s the good news?
Around the globe, there are 60 new reactors being built, and more are planned for the coming years. This should drive annual uranium demand up 50% by 2030.
At the moment, the market remains oversupplied as secondary sources fill demand gaps left by lower primary production. However, those stockpiles will eventually diminish, and there is a chance the uranium market could see a supply squeeze in the coming years.
This would lead contrarian investors to think Cameco should be a good bet for a long-term hold, and things might turn out that way, but there is one other issue to consider.
Cameco is embroiled in an ugly battle with the Canada Revenue Agency (CRA) over taxes due on revenue from a foreign subsidiary. If Cameco loses the case it could be on the hook for more than $2 billion in taxes and penalties.
Is one a good pick?
If you think oil has bottomed, Baytex offers some strong upside potential, but the oil market remains volatile and a drop in crude prices could send the stock back to the January low.
Regarding Cameco, there is light at the end of the tunnel, but the time frame could be years before uranium recovers, and the CRA issue is a big overhang on the stock.
Both names still carry too much risk for my liking, so I would be inclined to look elsewhere for contrarian opportunities.