Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) is trading close to where it was at this time last year, and investors are wondering if the sell-off is overdone.
Let’s take a look at the current situation to see if Baytex looks attractive today.
Oil market
A year ago, oil traded for US$42 per barrel. At the time of writing, it is close to US$52, representing a gain of more than 20%; it was as high as US$55 near the end of December.
The rally off the 2016 lows below US$30 has been impressive, but the majority of the support has come on the back of expectations for supply cuts from global producers.
What’s the story?
In response to low prices, OPEC and a number of other countries spent last year working on an agreement to reduce production by 1.8 million barrels per day (bpd) through June 2017 with an option to extend the cuts.
Oil recovered through 2016 on the expectations of the deal and received a nice boost after it was initially announced at the end of November.
Members of the pact began reducing output in January, and, for the most part, investors have believed the agreement would hold.
January production reports indicated compliance, but a March 2 data release out of Russia now has investors wondering if the situation was too good to be true.
Why?
Russia is supposed to trim production by 300,000 bpd by June. The country reduced output by 100,000 bpd in January, but production remained steady last month.
This has pundits suggesting the pact might be at risk of unraveling, which could send oil prices significantly lower.
OPEC says its members delivered 94% of the agreed cuts in February, so investors have to decide where they think the situation is headed.
If Russia says it is going to resume production cuts in March, oil could get a bit of a lift and remain above US$50 per barrel.
However, if Russian output remains at the current level or begins to rise again, the entire deal could be at risk.
In that situation, WTI oil could very well drop back to US$45 in the coming months.
Should you buy Baytex?
Baytex looks attractive if you believe oil is headed higher in the medium term. The company has managed to hold on to most of its assets through the downturn and would benefit significantly if oil were to move back above US$60.
However, the company is still carrying significant debt, and agreements negotiated with lenders have reduced its access to capital, so a steep plunge in oil prices would likely be bad news for investors.
At the current price below $5 per share, Baytex might be tempting, but I think the downside risks in the near term outweigh the potential gains.
As such, I would avoid the stock today.
