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Contrarian Investors: Is Baytex Energy Corp. Attractive?

Contrarian investors are always searching for troubled stocks that might be on the verge of a recovery.

Let’s take a look at Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to see if it deserves to be in your portfolio.

Tough times

Back in the glory days of US$100 oil, Baytex traded for $48 per share and paid one of the energy sector’s best dividends.

Today, investors can pick up the stock for less than $3.50, and the dividend is long gone.

To say it has been a rough ride is an understatement, and while long-term investors shouldn’t hold their breath for a return to the 2014 highs, contrarian investors might want to start kicking the tires.

Why?

Management has done a good job of keeping the company alive through the downturn. Baytex cut costs and negotiated new terms with lenders early in the rout. In addition, Baytex raised important capital through a stock issue when oil had a brief recovery in 2015.

As a result, the company avoided a fire sale of its assets to pay off debt, and that’s where things get interesting.

Attractive assets

Baytex has calculated its net asset value to be above $9 per share at oil prices that are lower than current levels. If you think the company’s numbers are correct, there could be a shot at some nice upside on a renewed oil rally.

Exit production for 2018 is expected to be 6% higher than last year, so things are moving in the right direction on that front. The recovery in oil prices through the end of last year has stalled a bit, but additional upside could generate extra cash for a boost to the capital program in the coming months.

Debt situation

Debt remains an issue, and that is why the stock continues to be volatile.

At the end of Q3 2017, Baytex had net debt of $1.75 billion, which is a lot for a company with a current market capitalization of less than $800 million.

Issuing new stock is not an option right now, and oil prices have not improved enough to generate adequate cash flow to make a meaningful dent in the debt position.

Should you buy?

The situation is better today than it was two years ago, but downside risks remain, so I wouldn’t bet the farm. However, if you are an oil bull and can handle the near-term volatility, Baytex might be worthy of a small contrarian position.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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