MENU

Baytex Energy Corp. Rallied 5.3% Yesterday: Why?

The price of oil closed above $51 per barrel yesterday, back to levels last seen in the spring, amid rising expectations that oil above $50 is something we can count on.

This comes as crude output is being cut by OPEC, and energy companies are exercising more capital discipline. And with inventories falling, the market appears to be showing signs of rebalancing.

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) is a high-risk name in the energy space due to the fact that it remains heavily indebted. With a debt-to-capital ratio of 48% and $25 million in interest expenses every quarter, this company is very vulnerable to weakness in the oil price, as it does not have the flexibility to withstand lower oil prices for very long.

So, what does this mean for Baytex?

Well, the company’s excessive debt has resulted in its share price falling to $3.78 from highs of more than $40 back in 2014.

But, as always, with higher risk, there is higher potential reward if things go well. And yesterday’s 5.3% rally will be just the beginning of a great run should oil prices continue to rise.

Oil at $50 per barrel means that Baytex is free cash flow neutral. Oil at $55 per barrel translates into incremental free cash flow of $75 million. And oil at $65 per barrel means incremental free cash flow of $175 million.

Operationally, Baytex is actually achieving momentum with production of 72,811 boe/d in the second quarter of 2017 — a 5% increase from the first quarter.

Oil services names such as Ensign Energy Services Inc (TSX:ESI) and Trican Well Service Ltd (TSX:TCW) also rallied yesterday off of the strength in oil prices, soaring 7.45% and 4.6%, respectively.

Although this is a higher-risk area, the oil services names typically outperform at the beginning of a cycle. So, if this is indeed where we are at right now, these names would be good additions to one’s portfolio for some extra torque.

With a dividend yield of 6.39%, and a second quarter 2017 that beat expectations, Ensign is benefiting from increasing activity in Canada and strengthening day rates.

Trican is benefiting from higher day rates and increasing activity levels in response to higher commodity prices.

In summary, I believe that the fact that these higher-risk and early cycle names rallied yesterday means that the market is becoming more and more convinced that the energy sector has much to look forward to in the form of higher prices, greater capital discipline, and higher returns.

1 Massive Dividend Stock to Buy Today (7.8% Yield!) - The Dividend Giveaway

The Motley Fool Canada's top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium "buy report" on a dividend giant he thinks everyone should own. Not only that - but he's created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up - and how you can avoid them.

For this limited time only, we're not only taking 57% off Dividend Investor Canada, but we're offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

Fool contributor Karen Thomas does not own shares in any of the companies listed in this article.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.