Is Baytex Energy Corp. or Suncor Energy Inc. a Better Oil Bet?

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Suncor Energy Inc. (TSX:SU)(NYSE:SU) are two of Canada’s most popular energy stocks. Is one worth buying today?

| More on:

Contrarian investors are searching for the best opportunities to benefit from a recovery in the oil patch.

Let’s take a look at Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Suncor Energy Inc. (TSX:SU)(NYSE:SU) to see if one should be in your portfolio.

Baytex

Two years ago Baytex was one of Canada’s dividend darlings and traded for more than $40 per share. Today, the dividend is history, and the stock can be picked up for a mere $5.80.

That’s a nasty fall, especially when you consider how fast it happened.

What’s the story?

Baytex loaded up on debt to pay for a $2.8 billion acquisition at the top of the market. As oil prices fell, revenue dried up, and Baytex had to scramble to stay alive.

Management did a good job of reducing expenses, raising capital, and renegotiating terms with lenders when they had the chance, and that has helped the company survive the rout.

The stock bottomed out below $2 per share in January and has rebounded somewhat on the back of a recovery in oil prices and reduced concerns about a possible bankruptcy.

Some pundits say the stock is a screaming buy, but investors have to be careful.

Baytex is still carrying significant debt and has less liquidity available as a result of its renegotiations with lenders; the company finished Q2 2016 with $1.54 billion in long-term debt and had used up nearly half of its available credit facilities as of June 30.

Net debt at the end of the quarter was $1.94 billion. That’s a lot for a company with a market cap of $1.15 billion.

Suncor

Suncor has held up well during the market rout, and management is taking advantage of the strong balance sheet to add strategic assets at discounted prices.

The company raised its ownership of Syncrude above 50% with the takeover of Canadian Oil Sands and subsequent purchase of Murphy Oil’s 5% stake. Suncor also just announced a deal to acquire a 30% interest in the North Sea Rosebank project.

The oil sands operations have endured a tough year with shutdowns due to the Albertan wildfires taking a bite out of production. Fortunately, Suncor owns refining and retail businesses that have offset the difficult times in the upstream operations.

The company’s integrated business model has enabled it maintain a healthy dividend. The current quarterly payout of $0.29 per share yields 3.3%.

Suncor finished Q2 2016 with $14.8 billion in long-term debt and $3 billion in cash and cash equivalents. Given the $56 billion in market capitalization, the company is on very sound footing.

Which should you buy?

Hardcore oil bulls with a stomach for volatility tend to prefer Baytex. The troubled producer definitely offers more torque to the upside if oil rallies, but it also comes with significantly more downside risk and could easily give back its 2016 gains if oil nosedives again.

Conservative investors should probably go with Suncor today. The giant pays an attractive dividend and is capable of riding out an extended downturn in the energy sector. When oil prices recover, Suncor will also benefit, but not as much as the pure-play producers.

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 Andrew Walker 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 »