Buying beaten-up stocks takes courage, but investors can reap hefty gains when they pick the right names ahead of a rebound.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to see if they might be interesting contrarian buys today.
IPL
Inter Pipeline owns oil sands pipelines, conventional oil pipelines, natural gas liquids (NGL) extraction assets and a liquids storage business in Europe. The company cruised through the oil rout in pretty good shape and management even took advantage of the downturn to acquire news assets at discounted prices, including the $1.35 billion purchase of two NGL extraction facilities. The deal also came with plans for a new development, and IPL recently gave the project the green light. Investors should see construction of the $3.5 billion Heartland Petrochemical Complex wrap up by the end of 2021. Once the new facilities are in service, IPL expects to generate additional long-term annual EBITDA of $450-500 million.
IPL raised the dividend last fall, supported by strong performances in its Canadian operations. The 2017 payout ratio was 62%, so the distribution should be safe. Investors could even see additional gains even as IPL works its way through a large capital program.
The stock is down amid the broader selloff in the energy infrastructure sector, but the drop from $28 a year ago to the current price of $22 might be a bit overdone.
IPL currently provides a yield of 7.6%.
Baytex
Baytex was a $48 stock back in the summer of 2014. By December of that year, the shares were selling for $15, and Baytex bottomed out close to $2 per share in early 2016. At the time of writing, investors can pick up the stock for $3.50.
The company closed a major acquisition just before oil prices began their extended slide, and the debt taken on to fund the transaction has been a heavyweight for Baytex and its shareholders. That’s the reason the stock has fallen so far — and indeed continues to see volatile moves every time oil looks like it might roll over again.
On the positive side, management has done a good job of avoiding a fire sale of the top assets; this is where contrarian investors are taking an interest. Baytex has estimated its net asset value above $9 per share based on oil prices that are lower than current levels. If you are comfortable with the company’s calculation, there could be some big upside opportunity in the stock for patient investors.
Oil appears to have stabilized above US$60 per barrel, which should give Baytex a bit of breathing room to boost its capital plan and chip away at the $1.7 billion in net debt. The company has a market capitalization of about $830 million, so you can see why investors get nervous when oil prices dip.
Should you buy?
At this point, I would probably make IPL my first choice. The dividend should be safe, so you can sit back and get paid well to wait for better days. Baytex likely offers more upside potential, but it also comes with higher risk due to the debt situation. Thus, any downturn in oil prices could send the stock back to the 2016 low.
