Oil stocks continue to endure difficult market conditions, and this has some contrarian types kicking the tires on the sector’s walking wounded.
Let’s take a look at Baytex Energy Corp. (TSX: BTE)(NYSE: BTE) and Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) to see if one is attractive right now.
Baytex
A quick look at this company’s three-year stock chart makes you want to cringe.
The company traded for more than $48 per share in the summer of 2014 and paid out an annualized dividend of $2.88 per share.
Today, the stock is below $4.50, and the dividend is history.
What happened?
Baytex got caught with too much debt and has paid the price as a result. The thing is, the company is still highly leveraged, which makes it vulnerable to another big dip in oil prices.
On the positive side, Baytex hasn’t been forced to unload all of its prized assets to stay alive, and management now has costs down to the point where the company can live within its cash flow at current or even lower oil prices.
If oil is destined to recover, this stock has some significant upside potential.
The challenge is that prices have to move high enough to generate the additional cash flow Baytex needs to boost drilling in a meaningful way and start paying off the debt load.
Baytex finished 2016 with $1.77 billion in net debt. At the time of writing, the stock has a market capitalization of about $1 billion, so you can see where the issue lies.
At some point, I think Baytex will be bought, so there is potential for investors to pick up a nice takeover premium. Unfortunately, it’s impossible to know when such a move might occur.
Cenovus
Cenovus just made big news with its $17.7 billion deal to buy oil sands and natural gas assets from ConocoPhillips (NYSE: COP).
The deal gives Cenovus 100% ownership in the Foster Creek, Christina Lake, and Narrows Lake oil sands sites, as well as attractive conventional oil and gas resource positions in the Deep Basin plays in Alberta and British Columbia.
The market didn’t like the deal, as investors continue to worry about oil prices and a potential U.S. border tax. Pundits are also concerned Cenovus could see its debt rating get downgraded if the company doesn’t get as much money as it hopes for non-core assets that will be sold to help fund the deal.
On the positive side, Cenovus will become Canada’s third-largest oil sands producer, and the addition of the Deep Basin assets should provide better product diversification.
Cenovus is already an integrated energy company with midstream assets that include ownership positions in refineries.
Is one attractive?
You have to be an oil bull to own any producers these days. If you don’t sit on that side of the fence, it would be best to avoid both stocks.
However, if you have a contrarian edge and like the oil story, both names have some attractive upside potential.
Cenovus is probably the safer bet, especially if you think a recovery might take another couple of years. Baytex likely offers more upside torque from the current level on a near-term oil recovery, but it also comes with more risk if things go the other way.
